Financial Services Update: Sustainable Finance – Recent EU Developments
03 September 2019
Recent guidelines introduced by the European Commission demonstrate its on-going efforts to strike a balance between ensuring the financial sector plays a critical role in transitioning to a climate-neutral economy while still funding large scale investments. The guidelines will provide assistance to an estimated 6,000 EU listed companies, banks and insurance companies, who under the Non-Financial Reporting Directive are required to disclose non-financial information.
Expert Group Reports
As outlined in our previous briefing, it is estimated that over the next 15 years the world will need to invest around US$90 trillion in sustainable infrastructure assets. Recent developments introduced by the European Commission illustrate an awareness that a financial system which supports sustainable growth will result in a low carbon, resource efficient and sustainable economy.
In June 2019, the European Commission’s technical expert group on sustainable finance (TEG) published three reports:
- A technical taxonomy report that provides practical guidance on how to support and invest in economic activities, that would contribute to the goal of a climate neutral economy, aimed at policy makers and investors. The Taxonomy Report not only provides technical screening criteria but also contains guidance and case studies for investors preparing to use it. In order for the tool to function effectively it will require improvements in the disclosure of climate-related information by companies. The Taxonomy Report proposes that companies disclose the proportion of their turnover and/or expenditure that substantially meet the criteria for contribution to, mitigation of or adaption to climate change as set out in the proposed Taxonomy. The report also states that partial steps to meeting criteria should be “encouraged”. Somewhat surprisingly, the TEG has stressed that the taxonomy is a comparative disclosure tool to assist market participants and not an instruction to investors to only invest in certain companies.
- A report on EU Green Bond Standards which recommends clear and comparable criteria for issuing green bonds. The EU GBS Report focuses on recommendations of how the market can monitor and support the implementation of the EU GBS. Interestingly, an EU Green Bond is broadly defined, encompassing any type of listed or unlisted bond or capital market debt instrument issued by a European or international issuer that is aligned with the EU GBS.
- A report on benchmarks that enables investors to adopt a climate-conscious investment strategy, and address the risk of greenwashing by setting out methodology and minimum technical requirements for indices. Among its many findings, the Benchmark Report sets out disclosure requirements for benchmark providers in relation to environmental, social and governance factors and their alignment with the Paris agreement.
Climate Reporting Guidelines
As part of its sustainable finance action plan, the European Commission published a set of guidelines and FAQs. These guidelines supplement recommendations previously published in 2017 by the Task Force on Climate-related Financial Disclosures (TCFD) and cover corporate climate related information reporting. The supplemental guidelines specifically encourage companies to read the TCFD recommendations and incorporate a number of them in the reporting procedures. .
The supplemental guidelines which are intended to be used for large scale companies, with 500 or more employees, provide practical recommendations to companies which will enable them to accurately report on the affects that their business activities have on the climate and conversely, the effect climate change is having on their business.
The supplemental guidelines are useful in that they provide explanations on certain key concepts related to corporate climate related reporting, such as materiality and climate related risks. They are geared towards risk management because they encourage companies to disclose any risk that might include a climate-related issue. They also direct companies to describe any links between principal climate-related risks and key financial performance indicators.
The European Commission’s commitment to publishing guidance materials so as to bring about a climate-neutral economy will ensure policy makers, companies and investors have a reliable measure of how “sustainable” an investment will be. The measures introduced by the European Commission will ensure that the financial sector plays a critical role in transitioning to a climate-neutral economy and in funding large scale investments.
For more information on incorporating any of the recommendations in your organisation’s climate reporting procedures, contact a member of our Financial Services team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.