EU proposes new measures to push sustainability in finance

The EU Sustainable Finance Package aims to channel more capital into sustainable financial products and business activities. According to the EU Commission, the measures contained in the package should enable investors to shift their investments to more sustainable technologies and companies.

This will create new incentives for climate-friendly decision-making, which would contribute to the EU achieving its goal of becoming climate neutral by 2050.

In particular, the EU wants information on sustainability in finance to become more reliable and comparable in order to avoid greenwashing.

The first component of the package is a delegated act that complements the EU Climate Taxonomy Regulation: it sets out technical criteria for businesses to meet so their financial products can receive the EU label 'green investment'.

"In the context of sustainable financing, the delegated act supplementing the EU Climate Tax Regulation is expected to play a significant role, particularly in the harmonisation of standards," said Domenico Schwan, a banking and finance law expert at Pinsent Masons, the law firm behind Out-Law. "This concerns, for example, criteria for project selection, use of funds and reporting. In the absence of regulation, market participants have so far developed their own guidelines for this, such as the Green Loan Principles and the Sustainability Linked Loan Principles, which were jointly drawn up by the international interest groups Loan Market Association, Asia Pacific Loan Market Association and Loan Syndications and Trading Association."

The EU Climate Taxonomy Regulation came into force last July and aims to create a classification system for environmentally sustainable economic activities that shall help investors to better identify which financial products and economic activities have a positive impact on the environment and climate. The system covers 13 business areas that account for about 80% of greenhouse gas emissions in the EU, such as energy, transport, forestry, manufacturing, buildings and insurance.

The delegated act now adopted by the Commission specifies the criteria for climate-friendly activities, lays down disclosure obligations for companies and financial market participants and is to apply from 1 January 2022. Before that, the European Parliament and the Council have to consider the delegated act. However, the question of whether investments in gas and nuclear power will be assessed as climate-friendly was postponed. A decision on this could be published in June, together with a second package of proposals from the EU Commission.

The second component of the package is a proposal for a directive on corporate sustainability reporting. It aims to amend the Non-Financial Reporting Directive (NFRD) and, according to the EU Commission, introduce uniform criteria on how companies have to report on the sustainability of their business activities.

"A uniform EU standard on sustainability reporting will also significantly affect the financial sector - not only at corporate level, but also for sustainable financing extended in the future," said Phillipp Staudt, banking and finance law expert at Pinsent Masons.

Since 2017 the NFRD obliges certain businesses in the EU to report on non-financial aspects of their investment products, but experts have repeatedly criticised that the information provided is often inconsistent, irrelevant or not very reliable. The EU now wants

to ensure more uniformity and transparency and also expand the group of businesses covered by the reporting obligation.

The third component of the package consists of six amendments to delegated acts, which primarily contain new obligations for financial advisors in dealing with investment transactions. In future, they are to consider the respective sustainability preferences in addition to the usual criteria, such as the financial situation and risk tolerance of the client, in the context of investment transactions during the so-called suitability assessment.