Hogan Lovells - Sustainable finance: a step forward from the EU Commission

As part of the European Green Deal, the EU Commission published on 21 April a package of rules to create a comprehensive sustainability framework, enhance the reliability and comparability of sustainability information, and put financial sector at the heart of a sustainable and inclusive economic recovery from the COVID-19 pandemic and the longer-term sustainable economic development of Europe.

The package is comprised of the EU Taxonomy Climate Delegated Act, a proposal for a new Corporate Sustainability Reporting Directive (CSRD) and six amending Delegated Acts on fiduciary duties, investment and insurance advice. The EU Taxonomy provides a common understanding of economic activities that make a substantial contribution to the EU’s environmental goals, by providing consistent, objective criteria in delegated acts. The Taxonomy Regulation tasks the Commission with establishing these technical screening criteria through delegated acts. The first delegated act under the EU Taxonomy on climate objectives sets criteria for economic activities in the sectors that are most relevant for achieving climate neutrality and delivering on climate change adaptation (such as energy, forestry, manufacturing, transport and buildings). The European Parliament and the Council only have a right to accept or reject the act in its entirety during the scrutiny period of 4 months that can be extended by an additional 2 months. Taxonomy Climate Delegated Act applies from 1 January 2022. Criteria for other environmental goals will follow in a later delegated act.

As to the CSRD, the Commission proposes the development of standards for large companies and separate, proportionate standards for SMEs, which non-listed SMEs can use voluntarily, to ensure that companies report reliable and comparable sustainability information needed by investors and other stakeholders. Companies will have to report on how sustainability issues, such as climate change, affect their business and the impact of their activities on people and the environment. Nearly 50,000 companies in the EU will need to follow detailed EU sustainability reporting standards, compared to 11,000 companies subject to the current requirements under the Non- Financial Reporting Directive. The Commission will engage in discussions with the European Parliament and Council in relation to the CSRD proposal.

Amending Delegated Acts will impact MiFID, AIFMD, UCITS Directive and IDD with the aim of ensuring that financial firms, such as advisers, asset managers or insurers, include sustainability in their procedures and their investment advice to clients. Specifically, as to:

• Fiduciary duties, the obligations of a financial firm when assessing its sustainability risks, such as the impact of floods on the value of investments, are clarified.
• Investment and insurance advice, an adviser must discuss the client's sustainability preferences when dealing with a client's suitability for an investment.
• Investment and insurance product oversight and governance, manufacturers of financial products and financial advisers will need to consider sustainability factors when designing their financial products.

The amended Delegated Acts are expected to start applying from around October 2022.

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