Sustainable Finance update (asset management) – European Commission’s new sustainable finance package

On 13 June 2023 the EU Commission published a new sustainable finance package with the aim of further strengthening the EU sustainable finance framework and ensuring that it continues to support companies and the financial sector, while encouraging the private funding of transition project and technologies.

The package is composed as follows:
 

1. I. Proposal for a regulation on ESG rating providers

The EU Commission is proposing a regulation to improve the reliability and transparency of ESG rating providers (the “ESG Rating Providers Regulation”).

Given the asset management industry’s current widespread reliance on ESG data and ESG scores provided by unregulated ESG data providers when devising ESG methodologies for financial products, this proposal aims at improving the quality and reliability of ESG data.

The proposed ESG Rating Providers Regulation lays down requirements for authorisation for EU established ESG rating providers and an equivalence decision and process for non-EU ESG rating providers, organisational principles and clear rules on the prevention of conflicts of interest as well as requirements designed to ensure the quality and reliability of ESG rating providers’ services to protect investors and market integrity.

Who is in scope? The proposal applies to ESG rating providers which offer and distribute ESG ratings in the EU on a professional basis. Exemptions are provided and they notably include in-house ratings and raw ESG data without ratings or scores.

The term “ESG rating” is defined in a broad manner and encompasses, amongst others, an opinion, a score or a combination of both regarding an entity or financial product’s ESG profile or characteristics provided to third parties and irrespective of its labelling.

What are the next steps? The proposal will now be submitted to the EU Parliament and the Council which must agree on the text in order for it to become EU law.

The text, if and once adopted, will apply six months after its entry into force. Transitional provisions are provided for ESG rating providers which provided their services at the date of entry into force of the ESG Rating Providers Regulation.
 

1. II. The EU Taxonomy Non-Climate Delegated Act

Also on 13 June 2023, the EU Commission adopted the Taxonomy Non-Climate Delegated Act which:

1.       introduces a new set of technical criteria in respect of the four remaining environmental objectives which are provided for in the Taxonomy Regulation and which started to apply on 1 January 2023, namely:

• the sustainable use and protection of water and marine resources;
• the transition to a circular economy;
• the pollution prevention and control;
• the protection and restoration of biodiversity and ecosystems.

2.       amends Taxonomy Delegated Regulation (EU) 2021/2178 (i.e. transparency in non-financial statements) to ensure that the disclosure requirements laid down in it are consistent with the provisions of the proposal.
 

1. III. Amendments to the Taxonomy Climate Delegated Act 2021/2139/EU

In addition, the EU Commission adopted a set of amendments to the Taxonomy Climate Delegated Act 2021/2139/EU, which expand on economic activities contributing to climate change mitigation and adaptation not included so far, such as the manufacturing and transport sectors (the “Amending Climate Delegated Act”).

As regards the application timeline, the Taxonomy Non-Climate Delegated Act and the Amending Climate Delegated Act will be notified to the EU Parliament and the Council and they will enter into force at the end of a four-month period, if no objection is expressed by the EU Parliament and/or the Council (or before, if they inform the Commission that they will not object). The application date provided for in the two delegated acts is 1 January 2024.  
 

1. IV. Draft recommendation on transition finance

The Commission published a recommendation (the “Recommendation on transition finance”). A recommendation is a non-binding EU Act and its objective is generally to provide guidance. In this case, the Recommendation on transition finance also gives practical examples for companies and the financial sector, with the aim to support market participants that wish to obtain or provide transition finance by offering practical suggestions on how to approach transition finance.

The text is addressed to:

1. (i) undertakings that want to contribute to the transition to climate neutrality and environmental sustainability, while enhancing their competitiveness and are seeking finance for investments for this purpose;
2. (ii) financial intermediaries and investors that are willing to provide transition finance to undertakings; and
3. (iiii) Member States and financial supervisory authorities, to raise awareness of the topic and provide technical assistance, to encourage the uptake and provision of transition finance to the real economy.

The recommendation is generally not intended to apply to micro enterprises, i.e. companies which employ fewer than 10 persons and the annual turnover and/or annual balance sheet total of which does not exceed EUR 2 million, given their size and administrative capacity.
 

1. V. EU Commission FAQ on the interpretation and implementation of Taxonomy Regulation and SFDR

On 12 June 2023, the EU Commission published an FAQ on the interpretation and implementation of Taxonomy Regulation and SFDR. In particular, the FAQ provides clarifications on how the operators should consider the requirements for compliance with minimum safeguards under the Article 18 of Taxonomy Regulation. Importantly, it also confirms that the Taxonomy-aligned investments qualify as ‘sustainable investments’ under the SFDR.