The European Commission has adopted an ambitious and comprehensive package of measures to help improve the flow of money towards sustainable activities across the European Union. By enabling investors to re-orient investments towards more sustainable technologies and businesses, measures adopted will be instrumental in making Europe climate neutral by 2050, and they aim at making the EU a global leader in setting standards for sustainable finance. The package is comprised of an EU Taxonomy Climate Delegated Act. a new Corporate Sustainability Reporting Directive and six Amendments to Delegated Acts on investment and insurance advice, fiduciary duties, and product oversight and governance.
The EU Taxonomy Climate Delegated Act aims to support sustainable investment by making it clearer which economic activities most contribute to meeting the EU’s environmental objectives.
The Delegated Act, politically agreed by the College of Commissioners, introduces the first set of technical screening criteria to define which activities contribute substantially to two of the environmental objectives under the Taxonomy Regulation: climate change adaptation (an economic activity pursuing this objective should contribute substantially to reducing or preventing the adverse impact of the current or expected future climate, or the risks of such adverse impact, whether on that activity itself or on people, nature or assets); and climate change mitigation (an economic activity pursuing this objective should contribute substantially to the stabilisation of greenhouse gas emissions by avoiding or reducing them or by enhancing greenhouse gas removals. The economic activity should be consistent with the long-term temperature goal of the Paris Agreement).
The EU Taxonomy Delegated Act is a living document, and will continue to evolve over time, in light of developments and technological progress. The criteria will be subject to regular review.
The proposal revises and strengthens the existing rules introduced by the Non-Financial Reporting Directive (NFRD). It aims to create a set of rules that will – over time – bring sustainability reporting on a par with financial reporting. It will extend the EU’s sustainability reporting requirements to all large companies and all listed companies. This means that nearly 50,000 companies in the EU will now need to follow detailed EU sustainability reporting standards, an increase from the 11,000 companies that are subject to the existing requirements. The Commission proposes the development of standards for large companies and separate, proportionate standards for SMEs, which non-listed SMEs can use voluntarily.
Overall, the proposal aims to ensure that companies report reliable and comparable sustainability information needed by investors and other stakeholders. It will ensure a consistent flow of sustainability information through the financial system. Companies will have to report on how sustainability issues, such as climate change, affects their business and the impact of their activities on people and the environment.
The proposal will also simplify the reporting process for companies. Many companies are currently under pressure to use an array of different sustainability reporting standards and frameworks. The proposed EU sustainability reporting standards should be a “one-stop-shop”, providing companies with a single solution that meets the information needs of investors and other stakeholders.
The six amendments encourage the financial system to support businesses on the path towards sustainability, as well as supporting existing sustainable businesses. They will also strengthen the EU’s fight against greenwashing.
When an adviser assesses a client’s suitability for an investment, they now need to discuss the client’s sustainability preferences.
Amendments clarify the obligations of a financial firm when assessing its sustainability risks, such as the impact of floods on the value of investments.
Manufacturers of financial products and financial advisers will need to consider sustainability factors when designing their financial products.
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