Investors worldwide are calling for a new and more straightforward frame of reference when it comes to ESG investing. The fact that ESG reports are hard to compare, not always reliable and aren't transparent enough are the most commonly cited complaints. Regulators and issuers are being urged to standardize their ESG disclosure policies to facilitate the assessment of ESG investments.
The European Union has been working on building a framework for a sustainable financial system for years. This framework, called the European Commission’s Sustainable Finance Action Plan (SFAP), aims to meet the climate goals set in the Paris Agreement and the European Green Deal. In addition, it seeks to help direct capital toward sustainable activities and prevent greenwashing, which stands for claiming that something is sustainable when in fact it isn’t.
Sustainable Finance Action Plan objectives:
- Channel capital flows toward sustainable investment in order to achieve sustainable and inclusive growth
- Include sustainability into risk management
- Foster transparency and long-termism in financial and economic activity.
The three cornerstones of the plan
- EU Taxonomy
The EU Taxonomy establishes the conditions and the framework to create a unified classification system (or taxonomy) on what can be considered environmentally sustainable economic activities.
- Sustainable Finance Disclosure Regulation (SFDR)
The regulation introduces obligations on institutional investors and asset managers to disclose how they integrate ESG factors in their risk processes.
- Benchmark Regulation
The regulation creates a new category of benchmarks, comprising low-carbon and positive carbon impact benchmarks, to help investors better understand the relative carbon impact of their investments.
The SFDR high level legislation came into force in March 2021 and imposed ESG disclosure requirements on EU institutional investors. This is expected to improve the comparability of funds and reduce the risk of ‘greenwashing’ . Financial market participants must implement the new requirements from January 2022.
This year's developments also include the publication of the EU Green Bond Standard proposal and the Renewed Sustainable Finance Strategy. From July, firms must publish statements on their websites describing their relevant policies and any actions taken to address adverse impacts.
A new package of measures
The European Commission adopted a comprehensive package of measures in April 2021 to help improve the flow of money toward sustainable economic activities across the EU.
The package includes:
- The EU Taxonomy Climate Delegated Act to support sustainable investments by making it clear which economic activities most contribute to meeting the EU's environmental objectives.
- A proposal for a Corporate Sustainability Reporting Directive (CSRD). This proposal aims to improve sustainability information in the corporate world. It is expected to make sustainability reporting more consistent, so that financial firms, investors and the broader public can use comparable and reliable sustainability information.
- The six amending Delegated Acts on fiduciary duties, investment and insurance advice will ensure that financial firms, such as advisers, asset managers or insurers, include sustainability in their procedures and their investment advice to clients.