The “EU Sustainable Finance Action Plan”, one of its main objectives is to involve the financial sector in the EU’s climate objectives.
The EU Disclosure Regulation has created new sustainability transparency obligations for market participants.
Significant investments are needed to meet the resilience, sustainability and carbon neutrality challenges of the Paris Agreement. Recognising this challenge, the European Commission has made sustainable finance one of the priorities of the Capital Markets Union and a pillar for achieving carbon neutrality by 2050.
The European Commission, therefore, convened a High Level Expert Group on Sustainable Finance (HLEG) in 2016, whose work led to the adoption of the “EU Sustainable Finance Action Plan” in 2018. One of its main objectives is to involve the financial sector in the EU’s climate objectives through the following levers:
- Redirecting capital flows towards sustainable investments to achieve sustainable and inclusive growth;
- Managing the financial risks of climate change, resource depletion, environmental degradation and social issues;
- Promote transparency and a long-term vision in economic and financial activities1 .
The Disclosure Regulation aims to improve the transparency of financial market participants to their investors on the sustainability of their activities.
Its 20 articles introduce new transparency obligations for market participants and a standard definition of several ESG-related concepts.
This action plan has led to the introduction of several regulatory initiatives:
- The Disclosure Regulation2 aims to improve the transparency of financial market participants to their investors on the sustainability of their activities;
- The Taxonomy Regulation3 creates a classification of economic activities and investments according to their sustainability;
- Amendments to the Benchmark Regulation4 strengthen the transparency of ESG benchmarks and provide a framework for the creation of benchmarks linked to the climate transition and the objectives of the Paris Agreement;
- Amendments to the sectoral directives (AIFM, MiFID 2) modify the organisational rules of management companies to integrate sustainability risks into their risk management processes.
Focus on the disclosure regulation
The cornerstone of the action plan, the Disclosure Regulation on sustainability reporting in the financial services sector, or Sustainable Finance Disclosure Regulation (SFDR), is published in November 2019. Its 20 articles introduce new transparency obligations for market participants and a standard definition of several ESG-related concepts.
In particular, this text defines the principle of double materiality by requiring market participants to communicate and report on their management of two types of ESG risks:
- Sustainability risk is the impact of events relating to environmental, social and governance factors on the value of an investment. This risk is financial. Market participants are now required to disclose how they integrate these sustainability risks into their remuneration policies (Article 5) and investment decisions, both at the entity level (Article 3) and for the financial products they market (Article 6). This information should be available on the company’s website and in the pre-contractual information.
- Negative sustainability impacts are the negative environmental, social or governance impacts of investment decisions. This risk is non-financial. The Regulation requires disclosure of whether or not material adverse impacts (MAIs) of investment decisions on sustainability factors have been taken into account at both entity (Article 4) and financial product (Article 7) levels. This information should be available on the company’s website and in the pre-contractual information. Actors taking into account these negative impacts must also publish an annual report covering 16 mandatory ESG indicators.
The Regulation also requires market participants to classify the financial products they market according to 3 categories defined in Articles 6, 8 and 9 of the text.
A new classification of financial products
The Regulation also requires market participants to classify the financial products they market according to 3 categories defined in Articles 6, 8 and 9 of the text:
- Article 6 – These financial products may take into account sustainability risks or be explicitly declared as non-sustainable.
- Funds Article 8 – These financial products promote environmental or social characteristics as part of their overall investment strategy. The investment targets must apply good governance practices.
Article 8 Plus – These financial products comply with the definition of an Article 8 fund and also commit to having a sustainable investment content and to respecting a minimum alignment threshold with the taxonomy, which is indicated in the pre-contractual documentation and can be verified at any time.
- Funds Article 9 – The objective of these financial products is sustainable investment, i.e. investment in economic activities that contribute to an environmental or social objective, according to the standardised classification provided by the Taxonomy Regulation. The investment targets must apply good governance practices and respect the principle of “Do Not Significant Harm” (DNSH), i.e. they must not cause significant harm to other environmental and social objectives defined by the Taxonomy.
Article 8 and Article 9 funds are subject to additional transparency and reporting requirements, through the publication of information:
- the way in which the ESG characteristics or the ESG objective will be met,
- periodic reports on how the ESG characteristics or the ESG objective have been achieved,
- Further information on the methodologies used can be found on the websites5.
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Notes and references:
Action Plan: Financing Sustainable Growth, European Commission
 Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability disclosure in the financial services sector, Official Journal of the EU
 Regulation (EU) 2020/852 of the European Parliament and of the Council on establishing a framework for sustainable investment and amending Regulation (EU) 2019/2088, Official Journal of the EU
 Regulation (EU) 2019/2089 of the European Parliament and of the Council amending Regulation (EU) 2016/1011 as regards the Union Climate Transition Benchmarks, the Union Paris Agreement Benchmarks and the publication of sustainability information for the benchmarks, Official Journal of the EU
 Presentation of the main provisions of the draft RTS under consultation related to the Disclosure Regulation, AMF
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