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Updated EU sustainable finance strategy: what are the key measures?

Author: ICAEW Insights

Published: 16 Jul 2021

A revised strategy published by the European Commission sets out a long list of additional actions to finance the transition to sustainability, strengthening the financial sector’s resilience to risks and combatting greenwashing.

With the EU estimated to need an additional €350bn per year over this decade to meet its existing 2030 emissions targets, the European Commission has moved to revise its 2018 action plan on financing sustainable growth. The new, enhanced Strategy for Financing the Transition to a Sustainable Economy is accompanied by proposals for a voluntary European Green Bond Standard and secondary legislation on the disclosures required under the EU Taxonomy. 

Reflecting sustainability risks in financial reporting standards

Emphasising the EU’s commitment to the ‘double materiality’ approach – seen as key to enabling the integration of financially material sustainability risk as well as sustainability impacts in decision-making processes – the Commission wants more work done to integrate sustainability considerations into financial reporting. This includes a specific ask of the IASB, EFRAG and ESMA to explore whether IFRS appropriately integrated sustainability risks, including climate risks.

Engagement with industry on biodiversity and natural capital accounting will continue, to encourage the development of standards in these areas too. Attention is also directed to improving the inclusion of relevant ESG factors in credit ratings and credit outlooks. A public consultation on the reliability, comparability and transparency of ESG market research and ratings is also foreseen.

More progress needed in the banking and insurance sectors

As the EU financial authorities, including the ECB have been making clear, the identification and management of sustainability risk by banks and insurers will be key for the EU’s economic resilience and financial stability. Finding progress to be insufficient, the Commission will propose legislative changes to prudential frameworks to ensure that ESG factors are consistently included in risk management systems and supervision. This will include climate change stress testing for banks via changes to capital requirement rules and amendments to Solvency II to include climate change scenario analysis by insurers. Greater attention will be paid to financial institutions’ own disclosures of sustainability targets and transition planning, while EIOPA will be asked to assess whether changes are needed to the fiduciary duties of pension funds and investors to reflect sustainability impacts. 

Strengthening the EU Taxonomy

Central to the updated strategy is a focus on enabling a more supportive framework to finance interim steps in the transition to climate neutrality. For the Commission this requires further strengthening of the EU Taxonomy, the EU’s classification system of sustainable activities. Measures announced include a potential extension of the Taxonomy to recognise activities with an intermediate level of economic performance as well as complementary rules to address activities not currently covered, such as agriculture and certain energy sectors. 

By the end of this year the Commission will also publish a report on what might be needed to establish social taxonomy. In 2022 technical screening criteria will be adopted under the EU Taxonomy Regulation focusing on water, circular economy, pollution prevention and biodiversity. 

The proposed measures are additional to the adoption of a new delegated act, published alongside the strategy, which specifies the content, methodology and presentation of information to be disclosed by large financial and non-financial companies on the share of their business, investments or lending activities that are aligned with the Taxonomy. The act is now subject to a four-to-six-month scrutiny period by MEPs and EU governments.

International cooperation

Reiterating support for the development of baseline global sustainability reporting standards by the IFRS Foundation, the Commission also wants to see greater cooperation in other international bodies to mainstream a double materiality approach. As a first step, the EU will press for an extension of the Financial Stability Board’s mandate to cover the contribution of the financial system to global climate and environmental objectives. Dialogue will also continue with international partners with the aim of finding agreement on common objectives and principles for taxonomies – and eventually to increase comparability and consistency of taxonomies’ metrics and thresholds.

New ESG labels and criteria

A number of activities are foreseen to encourage a more coherent approach to sustainable finance labels, including adjustments to the Prospectus Regulation to create targeted disclosure requirements for all ESG securities. The Commission will work towards defining a more general framework for labels for financial instruments as well as minimum sustainability criteria for financial products promoting environmental or social characteristics. Consideration will be given to the need for an ESG benchmark label.

A European green bond standard

Published alongside the strategy, the proposed European green bond standard aims to scale up the growing green bond market, enabling issuers to raise funds to finance large-scale investments, while meeting sustainability requirements. The standard will be voluntary and open to any issuer of green bonds – including companies, public authorities and third-country issuers. It is centred around four key requirements, namely alignment with the EU Taxonomy, full transparency on allocation of bond proceeds through detailed reporting requirements, external verification and supervision by ESMA.

Empowering SMEs and retail investors

For the Commission, the EU’s 23 million SMEs urgently need better access to sustainability advisory services based on their specific needs. Alongside the simplified voluntary sustainability reporting standards proposed in the draft Corporate Reporting Sustainability Directive, more EU support will be available for national efforts to provide capacity building and technical advice on how SMEs can report on sustainability risks and impacts.

With a view to supporting retail investors, measures are proposed to encourage uptake of green retail loans, green mortgages and energy efficient mortgages. The Commission also wants to see improvements in the level of sustainability expertise of financial advisors while supporting individuals’ sustainable finance literacy. 

Mixed approaches to digital 

While encouraging the uptake of digital sustainable finance tools, particularly for SMEs, the Commission raises concerns about the environmental impact of some digital finance technologies, including crypto assets. An assessment of their sustainability impact will be undertaken with a view to ensuring they are climate neutral and energy efficient by the end of the decade.

Green budgeting in the public sector

Building on the Commission’s own experience with green budgeting tools, the strategy sets out steps for greater cooperation with EU countries to strengthen methodologies for climate and biodiversity spending, supporting efforts to redirect national budgets to green priorities.  

Further reading:

ICAEW response to the EU stakeholder consultation on a renewed sustainable finance strategy 

Failure to address climate change could lead to global economic collapse

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