ESG: The Commission publishes a new package of measures

On 13 June 2023, the European Commission published a package of measures intended to develop and strengthen the EU’s sustainable finance framework. The aim of the package is to ensure that the framework is easier to use and “works for companies that want to invest in their transition to sustainability”.

What does the package contain?

The principal items of interest are

1. Proposed Level 2 Delegated Acts under the Taxonomy Regulation

The Commission has approved in principle

• a draft Taxonomy Environmental Delegated Regulation and annexes, which would
  • establish Technical Screening Criteria (TSC) for activities that can make a substantial contribution to the environmental objectives for which TSCs are not already available.
    These objectives are: (i) transition to a circular economy, (ii) control or protection and restoration of biodiversity, (iii) pollution prevention and (iv) use and protection of water and marine resources and
  • amend the Disclosures Delegated Act, to clarify the disclosure obligations for the additional activities and supplement the requirements in Article 10 of the Disclosures Delegated Act and
• targeted amendments to the Taxonomy Climate Delegated Act and annexes – these cover economic activities that make a substantial contribution to the environmental objectives of (i) climate change mitigation and (ii) climate change adaptation but which have not been previously included in the taxonomy.

The new measures aren’t yet available in all EU official languages so the texts have not yet been formally published.

When they have, the Commission will formally adopt them and send them to the European Parliament and the Council of the EU for their consideration. The EP and Council will have four months to review, extendable once by either institution for an additional two months.

For a summary of the proposals on which the Commission consulted on from 5 April to 3 May 2023, see our article ESG: Commission consults on new Taxonomy Regulation Level 2 measures.

The newly published texts make minor tweaks to those consulted on.

The published draft amendments to the Disclosures Delegated Act, for example, require financial market participants to disclose only

• the proportion in their covered assets of exposures to Taxonomy non-eligible and Taxonomy-eligible economic activities under the Taxonomy Environmental Delegated Regulation (when published in final form) and the relevant sections of Annexes I and II of the existing Taxonomy Climate Delegated Act and
• qualitative information specified in Annex XI relating to economic activities referred to in point (a) between 1 January 2024 and 31 December 2025 (rather than 31 December 2024, as in the consultation draft).

The measures are expected to apply as of January 2024.

2. A proposal for a Regulation on ESG ratings providers

The Commission has also published a proposed Regulation on ESG Ratings Providers together with three associated Annexes and a summary of the Commission Staff’s impact assessment for the proposal.

Noting its view that “the ESG ratings market currently suffers from a lack of transparency”, the Commission is putting forward measures intended to

• improve the reliability and transparency of ESG ratings activities
• set out organisational principles and clear rules on the prevention of conflicts of interest
• enable investors to make better informed decisions regarding sustainable investments.

Among other things, the proposal would require ESG rating providers which offer services to investors and companies in the EU to be authorised and supervised by ESMA.
The Commission will now engage in discussions with the European Parliament and Council to agree a final text in due course.

3. A Commission communication

The Communication, entitled “A sustainable finance framework that works on the ground”, explains how the sustainable finance framework operates and the Commission’s plans on how to improve it and to encourage additional investment in sustainable activities.

The Commission confirms that there will be a consultation in Autumn 2023 on assessing the implementation of SFDR. The focus will be on assessing shortcomings in the SFDR around legal certainty, usability and mitigating greenwashing.

The Commission also notes its aim that, when a company reports sustainability information in accordance with the EU’s sustainability reporting standards (ESRS), this will be deemed compliant with global standards. To this end, the Commission is working closely with the ISSB and the Global Reporting Initiative.

The Commission intends to adopt further guidance on the Taxonomy Regulation by the end of 2023, focussing on taxonomy alignment reporting obligations for financial undertakings, which have to report their green assets ratio and other KPIs from 1 January 2024.

On monitoring reporting under Article 8 of the Taxonomy Regulation, the Commission has mandated the Platform on Sustainable Finance (PSF) to submit recommendations, which

• ensure the taxonomy criteria and disclosures are usable on the ground for all actors in scope; and
• enhance the usability of the taxonomy for non-EU businesses or economic activities conducted outside the EU.

A Staff Working Document accompanies the Communication. This

• sets out an overview of the key pillars of the regulatory framework and
• summarises actions taken to enhance the usability both of the taxonomy and the wider sustainable finance framework.

4. Recommendation on transition finance

The draft recommendation and associated annex on facilitating finance for the transition to a sustainable economy are intended to show undertakings that want to contribute to the transition to climate neutrality and environmental sustainability how they can use the various tools of the EU sustainable finance framework to channel investments into the transition and manage their risks stemming from climate change and environmental degradation.

5. FAQs on the interpretation of the Taxonomy Regulation and SFDR

The Commission’s Notice of 12 June 2023 contains FAQs which, among other things, helpfully clarify that Taxonomy-aligned investments can qualify as sustainable investments under the SFDR
The Notice also covers:

• The role of minimum safeguards in the Taxonomy Regulation.
• How minimum safeguards and defined under Article 18 of the Taxonomy Regulation.
• Key expectation for undertakings under Article 18 of the Taxonomy Regulation.