How EU Sustainable Finance proposals will affect the finance industry and its clients

This briefing has been put together by the Hume Brophy financial services team in Brussels. We first examine the three legislative proposals published in May and their potential loopholes. We then analyse to what extent these proposals could have an impact on non-financial actors and we observe what possible next steps in the EU legislative process might be.

Three years ago landmark international agreements were established with the adoption of the Paris Agreement and the UN 2030 Agenda for Sustainable Development.

The One Planet Summit which took place in Paris last December and aimed at mobilising public and private finance in support of climate action created a political momentum around sustainable finance.

And following the US withdrawal from the Paris Agreement the European Union (EU) has been given an opportunity to become a global leader in this field.


Sustainable Finance Action Plan
Following the publication of its sustainable finance Action Plan in March, the European Commission published a first package of legislative measures on sustainable finance impacting financial institutions.


The proposals address three main areas:

  • Establishing an EU sustainability taxonomy
  • Formalising investors duties and disclosure obligations in relation to environmental, social and governance (ESG) factors
  • And the creation of low-carbon and positive carbon impact benchmarks


EU taxonomy for sustainable activities

The regulation lays out conditions for identifying environmentally-sustainable economic activities and defines the six environmental objectives to which economic activities will have to contribute to be considered eligible.

Asset managers, institutional investors, insurance distributors and investment advisors will have to disclose the way in which, and the extent to which, criteria determining the environmental sustainability of an investment were taken into account in investment decision-making processes.

Disclosures relating to sustainable investments and sustainability risks
The regulation is about integrating ESG considerations into the investment and advisory process, whether or not financial market participants pursue sustainability investment objectives.

Low-carbon benchmarks
The regulation puts forward an amendment to the Benchmark Regulation which establishes two categories of benchmarks, namely the low-carbon benchmark and the positive carbon impact benchmark.

The expectations around this sustainable finance package have been very wide-ranging. Its contents have long been uncertain and stakeholders have disagreed on the extent to which sustainable finance should, or indeed can, be regulated.

 

Although countries will not want to be seen to be going against the green agenda, there might be some pushback

 

Being keen to avoid “green washing” i.e. labelling a product as environmentally friendly when it’s actually not, the European Commission had to strike the right balance between encouraging the financial sector to invest in sustainable assets and not over-regulating market participants too early and too fast.

However, despite the contributions that these legislative proposals can mean for the development of sustainable finance, opposition from Member States, the financial services sector and the non-financial industry is likely to arise in some areas.

 

A pushback coming from the Member States and the industry?
Sustainable finance is, in theory, an easy win for the European Commission.

Despite criticising the fact that the legislative proposals are not ambitious enough, civil society actors have praised the initiatives, lauding them for speeding up the transition to a sustainable economy.

Nevertheless, Member States may not react with such enthusiasm. Indeed, they are likely to express concerns over the taxonomy proposal, which may have an impact on the technologies around the supply and sources of energy; coal, gas, oil, nuclear, renewables, amongst others.

Some Member States will be very reluctant to give EU institutions even an indirect say on aspects of their energy policy. Therefore, although countries will not want to be seen to be going against the green agenda, there might be some pushback, and it remains unclear if there will be unity on the issue.

A different dynamic might come from the European Parliament, which has adopted its own report on sustainable finance in May 2018. Even if it is not legally binding, this report will be politically important since it will represent the official position of the institution on sustainable finance.

The list of measures called for by MEPs is broader than the measures produced by the European Commission and the report was voted with the support of a large majority.

More generally, if this sustainable finance package targets at first sight the financial sector, the consequences for non-financial actors will be considerable in the future. The proposed package of legislative measures could in the medium and long-term have a significant impact on how corporate issuers interact with financial market participants and could have an impact on the cost of capital for issuers.

It therefore should be of paramount interest to Chief Financial Officers and treasury and investor relations department.

New policy initiatives are also expected to be issued, notably on green labels or disclosure and accounting. Businesses will thus progressively face new expectations related to ESG considerations from society and regulators.

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