Explanatory Memorandum to COM(2018)353 - Establishment of a framework to facilitate sustainable investment - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2018)353 - Establishment of a framework to facilitate sustainable investment. |
|---|---|
| source | COM(2018)353  |
| date | 24-05-2018 |
1. CONTEXTOFTHEPROPOSAL
• Reasons for and objectives of the proposal
This proposal is part of a broader Commission initiative on sustainable development. It lays the foundation for an EU framework which puts Environmental, Social and Governance (ESG) considerations at the heart of the financial system to support the transformation of Europe's economy into a greener, more resilient and circular system. To make investments more sustainable ESG factors should be considered in the investment decision making process, when taking into account factors such as greenhouse gas emissions, resource depletion, or working conditions. This proposal, and the legislative acts proposed alongside it, aim at integrating ESG considerations into the investment and advisory process in a consistent manner across sectors. This should ensure that financial market participants (UCITS management companies, AIFMs, insurance undertakings, IORPs, EuVECA managers and EuSEF managers), insurance distributors or investment advisors, who receive a mandate from their clients or beneficiaries to take investment decisions on their behalf, integrate ESG considerations into their internal processes and inform their clients in this respect. Furthermore, to help investors compare the carbon footprint of investments, the proposals introduce new categories of low carbon and positive carbon impact benchmarks. These proposals which are mutually reinforcing should facilitate investments in sustainable projects and assets across the EU.
In particular, this proposal sets out uniform criteria for determining whether an economic activity is environmentally sustainable. It further sets out a process involving a multi-stakeholder platform to establish a unified EU classification system based on a set of specific criteria, in order to determine which economic activities are considered sustainable.
This would provide economic actors and investors with clarity on which activities are considered sustainable in order to inform their investment decisions. It would help ensuring that investment strategies are oriented towards economic activities which are genuinely contributing to the achievement of environmental objectives, while also complying with minimum social and governance standards. Greater clarity on what can be considered an environmentally sustainable investment will facilitate access to cross border capital market for environmentally sustainable investment.
The Commission’s package follows global efforts towards a more sustainable economy. Governments from around the world have chosen a more sustainable path for our planet and our economy by adopting the 2016 Paris Agreement on climate change and the United Nations (UN) 2030 Agenda for Sustainable Development.
The EU is committed to a development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Sustainability has since long been at the heart of the European project. The EU Treaties give recognition to its social and environmental dimensions, which should be addressed together.
The 2016 Commission Communication on the next steps for a sustainable European future links the Sustainable Development Goals (SDGs)1 of the UN 2030 Agenda for Sustainable Development to the European policy framework to ensure that all EU actions and policy initiatives, within the EU and globally, take the SDGs on board at the outset. The EU is also
The 17 SDGs provide qualitative and quantitative objectives for the next 15 years to prepare ourselves for the future and work towards human dignity, stability, a healthy planet, fair and resilient societies and
fully committed to reaching the EU 2030 climate and energy targets and to mainstream sustainable development into EU policies, as announced in the 2014 Political Guidelines for the European Commission2 by Jean-Claude Juncker. Therefore, many of the European Commission’s policy priorities for 2014-2020 feed into the EU climate objectives and implement the 2030 Agenda for Sustainable Development. These include the Investment Plan for Europe,3 the Circular Economy Package,4 the Energy Union package,5 the Update of the EU Bioeconomy Strategy,6 the Capital Markets Union7 and the EU budget for 2014-2020, including the Cohesion fund and research projects. In addition, the Commission launched a multi-stakeholder platform to follow-up and exchange best practices on SDG implementation.
Achieving EU sustainability goals requires important investments. In the climate and energy space alone, it is estimated that an additional annual investment of EUR 180 billion is needed to meet climate and energy targets by 2030.8 A substantial part of these financial flows will have to come from the private sector. Closing this investment gap means significantly reorienting private capital flows towards more sustainable investments and requires a comprehensive rethinking of the European financial framework.
In this context, the Commission established in December 2016 a High-Level Expert Group (HLEG) to develop an EU strategy on sustainable finance. The HLEG published its final report9 on 31 January 2018. This report provided a comprehensive vision on sustainable finance for Europe and identified two imperatives for Europe's financial system. The first is to improve the contribution of finance to sustainable and inclusive growth. The second is to strengthen financial stability by incorporating Environmental, Social and Governance (ESG) factors into investment decision-making. The HLEG issued eight key recommendations, which it believes are essential building blocks of a sustainable European financial system. Among these recommendations, the HLEG calls for the establishment of a technically robust classification system at EU level to provide clarity on what is green or sustainable – a so-called sustainability taxonomy. The advice of the expert group was to start, as a first step, with establishing when an economic activity can be considered as environmentally sustainable.
To follow-up on the work of the HLEG, the Commission published an Action Plan on Financing Sustainable Growth10 on 8 March 2018. This committed it to tabling a legislative proposal in Q2 2018 ensuring the gradual development of an EU taxonomy for climate change and environmentally and socially sustainable activities, building on existing work where relevant. The aim is to embed the future EU taxonomy in EU law and provide the basis for using that classification system in different areas (e.g. standards, labels, sustainability benchmarks).
2 A New Start for Europe: My Agenda for Jobs, Growth, Fairness and Democratic Change - Political Guidelines for the next European Commission, Strasbourg, 15 July 2014 available at:
https://ec.europa.eu/commission/sites/beta-political/files/juncker-political-guidelines-speech_en.pdf
3 COM(2014) 0903 final.
4 COM(2015) 614 final.
5 COM(2015) 80 final.
6 Commission Staff Working Document on the review of the 2012 European Bioeconomy Strategy (SWD(2017) 374 final)..
7 COM(2015) 468 final.
8 The estimate is a yearly average investment gap for the period 2021 to 2030, based on PRIMES model projections used by the European Commission in the Impact Assessment of the Proposal of the Energy Efficiency Directive (2016), available at: eur-lex.europa.eu/legal-content/EN/TXT:52016SC0405.
9 EU High-Level Expert Group on Sustainable Finance Final Report, Financing a Sustainable European Economy, available at: https://ec.europa.eu/info/sites/info/files/180131-sustainable-finance-final-report_en.pdf
10
• Consistency with existing policy provisions in the policy area
The proposal establishes the criteria and the process to identify environmentally sustainable investment, to ensure that the single market is not distorted by different interpretations of this concept across Member States. This proposal is consistent with other policy provisions in the policy area of the single market and financial markets, as it does not interfere with any existing provision but allows existing and future legal provisions to use and build on the common concept of environmentally sustainable investment in the future. There are no differences from or inconsistencies with other single market policy provisions.
• Consistency with other Union policies
The proposal complements existing EU environmental and climate policies. The common understanding of what constitutes environmentally sustainable investment will complement existing EU environmental policies by providing a reference point which they can use in the future so that such policies develop more consistently across the Union. The proposal builds on existing policies and uses the concepts developed under those policies to ensure consistency. It builds on the concepts developed under the 7th Environmental Action Programme,11 the Water Framework Directive,12 the Action Plan for the Circular Economy,13 the Industrial Emissions Directive14 such as when referencing the 2030 Agenda for Sustainable Development, the Ecolabel Regulation,15 the Statistical Classification of Economic Activities in the European Community (NACE),16 the Classification of Environmental Protection Activities and Expenditure (CEPA) and the Classification of Resource Management Activities (CReMA).17
2. LEGALBASIS, SUBSIDIARITYAND PROPORTIONALITY
• Legal basis
Article 114 of the Treaty on the Functioning of the European Union (TFEU) confers on the European Parliament and the Council the competence to adopt measures for the approximation of the provisions laid down by law, regulation or administrative action in Member States which relate to the establishment and functioning of the internal market. Article 114 TFEU enables the EU to take measures to eliminate current obstacles to the exercise of the fundamental freedoms and to prevent such obstacles from emerging, including those that make it difficult for economic operators, including investors, to take full advantage of the benefits of the internal market.
Currently Member States differ in their interpretations as to what counts as sustainable investment. Some Member States have in place labelling schemes or market-led initiatives to determine what qualifies as green for investment purposes, others do not have any rule in place but are likely to legislate in this field based on their own definition of sustainable
11
Decision No 1386/2013/EU.
Directive 2000/60/EC.
COM/2015/0614 final.
Directive 2010/75/EU.
Regulation (EC) No 66/2010.
establishing the statistical classification of economic activities NACE Revision 2 and amending Council
Regulation (EEC) No 3037/90 as well as certain EC Regulations on specific statistical domains (OJ L
Annex 4 and 5 of Regulation (EU) No 538/2014 of the European Parliament and of the Council of 16
April 2014 amending Regulation (EU) No 691/2011 on European environmental economic accounts
7
investment. National labels based on different criteria as to which economic activities qualify as environmentally sustainable make it difficult for investors to compare green investment, thus discouraging them from investing across borders.
Existing divergences are also a burden on economic operators having to comply with different standards in different Member States. To address existing divergences and prevent any further barriers to the internal market from emerging, this proposal establishes a standard EU-level definition of what qualifies as an environmentally sustainable economic activity for investment purposes. The purpose of this proposal is to standardise the concept of environmentally sustainable investment across the Union, thereby facilitating investment in environmentally sustainable economic activities, both nationally and in more than one EU country. The standardised concept will also enable economic operators to attract investment from abroad more easily.
Article 114 of the TFEU provides the legal basis on which the EU can adopt this proposal, since its objective is to facilitate EU-wide investment in sustainable economic activities, irrespective of national boundaries.
• Subsidiarity (for non-exclusive competence)
This proposal complies with the principle of subsidiarity, set out in Article 5 of the Treaty on European Union (TEU). This principle states that action may be taken at EU level only if the aims envisaged are not achievable at a lower level.
The existing lack of clarity as to what constitutes an environmentally sustainable economic activity could be exacerbated if Member States attempt to take action in that field in parallel, without coordination. Given the commitments to environmental and climate policy goals at both international (e.g. Paris Agreement) and EU level, more and more Member States are likely to explore the option of introducing labels for sustainable financial products, using their own bespoke taxonomies. This would exacerbate national barriers to the operation of capital markets for raising funds for sustainable projects. Diversifying classification systems would increase market fragmentation and raise competition problems, making it more difficult and costly for investors to understand what is and what is not sustainable.
The criteria for determining what constitutes a sustainable activity for investment purposes should therefore be standardised at EU level. Subsequently, a uniform EU classification system should be established through a process involving all relevant stakeholders. This will make it easier for economic operators to attract capital for sustainable investment from across the EU. It will be a first step towards tackling ‘greenwashing’ and will make it easier for investors to identify the criteria applied when classifying a financial product as green or sustainable. The proposal is thus designed to address the shortcomings of the existing legal framework by establishing standard criteria for ascertaining what counts as environmentally sustainable investment. EU-level action is more effective in guaranteeing uniformity and legal certainty as regards the exercise of Treaty freedoms.
• Proportionality
This proposal complies with the principle of proportionality set out in Article 5 TEU. The proposed measures create incentives for investing in green activities without penalising other investments. They are necessary to make matters clear for investors by standardising at EU level the criteria used to ascertain the degree of an investment’s environmental sustainability. Providing standard criteria will make it easier for investors to identify the relative
environmental sustainability of a given investment, and to compare investments both nationally and across Member States.
The proposal is designed to address the divergence of existing national taxonomies and market-based initiatives at national level, in order to tackle the risk of ‘greenwashing’, make it easier for economic operators to raise funds for environmentally sustainable activities across borders, and to try to establish a level playing field for all market participants.
As regards the costs of such harmonisation on financial market participants, the proposal introduces a disclosure obligation only for those who offer financial products that they claim to be environmentally sustainable. This will become applicable only once the EU classification system has been developed. Moreover, the approach taken in this proposal provides enough flexibility for Member States to decide on specific details of national labels, such as flexibility for financial market participants as regards the degree to which the financial product being offered contains assets considered environmentally sustainable under the EU classification system.
Consequently, the proposal does not go beyond what is necessary to tackle the issues at EU level.
• Choice of the instrument
This proposal is designed to standardise the way in which an investment’s degree of environmental sustainability is determined, by laying down the criteria such an investment must fulfil, in order to avoid diverging national approaches. A different choice of instrument, such as a non-legislative measure or a directive providing minimum harmonisation, would leave to Member States the discretion to define environmentally sustainable investment based on divergent classifications of economic activities. Such discretion could make the single market more fragmented and mean that financial products with a poor environmental performance will still be labelled as environmentally sustainable. This proposal ensures that financial market participants who offer financial products as environmentally sustainable investments or as investments with similar characteristics make it clear to investors why such products can be considered environmentally sustainable, building on uniform criteria established at EU level. A directly applicable regulation, providing full harmonisation, is necessary to achieve these policy objectives. A regulation is thus the best way to achieve full harmonisation, avoid divergences and thus ensure greater clarity for market participants.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER
Contents
- CONSULTATIONS
- 12 13 14 15 16
- Regulation (EC) No 1893/2006 of the European Parliament and of the Council of 20 December 2006
- 393/1, 30.12.2006, p.1.)
- taxonomy (i.e. a classification of sustainable economic activities) at EU level. Many of them said an EU taxonomy should build upon, or at least take into
- this shared
- in the context of green
- This proposal launches a gradual process for the establishment of an EU classification system , involving a broad range of stakeholders with the relevant knowledge and expertise. As first
- declaration
- The Commission should also take into account the potential impact of these criteria on the valuation of those assets that until the adoption of the technical screening criteria were
- Article 16 governs the
ANDIMPACTASSESSMENTS
Stakeholder
consultations
Stakeholders’ views were gathered through a public consultation on the Interim Report by the
High Level Expert Group on sustainable finance, and targeted interviews of financial institutions, conducted by the Commission. Stakeholders were asked what an EU taxonomy should cover, whether they saw a need for regulatory intervention, and what scope an EU taxonomy should initially have. The views gathered on these three themes may be summarised as follows:
• EU regulatory intervention - most respondents were in favour of developing a
taxonomy (i.e. a classification of sustainable economic activities) at EU level. Many of them said an EU taxonomy should build upon, or at least take into
account, existing international frameworks (e.g. UN SDGs) and
classifications
(e.g. the work of the Climate Bonds Initiative, Eurosif, the Task Force on Climate-Related Financial Disclosures, etc.).
• Scope - a majority of the respondents indicated that an EU taxonomy should eventually cover all sustaina bi lity objectives (environment and social). Some respondents favoured a step-by-step approach starting with environment.
• Level of detail - views differed as regards the level of detail an EU taxonomy should have. While the financial industry generally favoured a non - prescriptiv e taxonomy, other stakeholders (private individuals and civil society) preferred a
more detailed taxonomy, providing clear definitions and ( m e asureable) criteria.
The Commission's proposal is broadly in line with the stakeholders' views in so far as it: i) sets out uniform criteria and a clear process for the establishment of a taxonomy of environmentally sustainable activities in a legally binding act, based on environmental objectives; ii) ensures that the EU taxonomy is built on existing international frameworks and is granular and detailed enough to provide the basis for a common and unique language on sustai nability; iii) provides for a review clause to possibly cover also social objectives. This should address the current fragmentation and bring the needed clarity for investors as to what environmentally sustainable economic activities are.
• Collection and use of expertise
The proposal is built on the High Level Expert Group on sustainable finance's final report which recommends to establish and maintain a common sustainability taxonomy at EU level.
According to this report,
EU classification of sustainable activities, should:
be aligned with the EU’s declared public policy goals, including the implementation of the Paris Agreement, the SDGs;
give capital market participants guidance on the relevance of specific activities or the contribution they make;
the parameters of the taxonomy and the data underpinning them should be freely accessible, and should be developed through a multi-stakeholder process so as to ensure market buy-in;
be an evolving tool. The science around sustainability is dynamic and evolving, as are social expectations as well as investor and market needs. Therefore, the taxonomy should be considered to represent the best of our currently available knowledge and will require continuous review.
The proposal also builds upon a study 'Defining 'green' commissioned by the Commission in 2017 presenting:
finance'
• an overview and analysis of worldwide efforts to define ‘green’ in the context
of green bonds, lending and listed equity;
• the means and scope for identifying green assets and activities through conceptual definitions, taxonomies, ratings methodologies and other mechanisms;
• a list of available green definitions, descriptions and assessments of selected definitions, as well as a comparison of available green sectoral taxonomies.
This proposal launches a gradual process for the establishment of an EU classification system , involving a broad range of stakeholders with the relevant knowledge and expertise. As first
step, this proposal sets out the framework to establish uniform criteria to show when an economic activity can be considered as environmentally sustainable. The Commission will afterwards identify the activities which will qualify as sustainable while drawing on the technical advice of a platform on sustainable finance consisting of experts.
This approach reflects the fact that knowledge of environmental impacts and expertise in the field are developing rapidly. The legal framework must therefore remain flexible, so that it can be updated where necessary in the light of future scientific, technological and market developments. Secondly, this proposal takes account of the high level of complexity, detail, granularity and, hence, resources required; this is such that the EU classification will need to be developed gradually, starting with those environmental areas where action is most urgently needed and knowledge is more advanced.
Impact
assessment
The proposal takes into account the opinions (the positive opinion with reservations issued on 14 May 2018 and the previous two negative opinions) issued by the Regulatory Scrutiny Board (RSB) . The proposal and revised impact assessment address the comments of the RSB, which concluded in their opinions that adjustments were necessary before proceeding further with this initiative. Comments received as part of the positive third opinion focused on:
• ensuring clarity regarding the operationalisation of the notions of do no harm and contributing substantially to susta ina b ility;
• ensuring that the monitoring and evaluation framework includes issues and risks that have to be taken into account when developing the technical screening criteria;
• making more transparent the cost-benefit trade-off when comparing options
These concerns were addressed in the final and revised version of the impact assessment. Comments received from the RS B previously were fully addressed both in the proposal and the accompanying revised impact assessment and can be grouped into three broader areas of concern:
First, and more generally, the RS B suggested that the impact assessment should better explain the scope, sequencing and coherence of the various measures, including the taxonomy and how it relates to the other proposals. As such, the final version of the impact assessment benefitted from the following improvements:
• the immediate and potential future uses of the taxonomy were better described, as well as how it would be operati on al ised;
• it was clarified that the nature and magnitude of the costs on stakeholders would be impact-assessed before the adoption of each delegated act establishing the technical screening criteria;
• the consistency and complementarity with existing EU legislation and policies in other areas (e.g. environment and climate, energy, transport) was explained;
• the sequencing and the interactions between an environmental taxonomy and a social taxonomy were explained;
• how the taxonomy would be expanded and updated over time was clarified and the associated administrative costs estimated;
• it was clarified how the co- le g islators would be nformed/involved throughout the develop m ent of the technical screening criteria.
Second, and more specifically, the RS B expressed concerns regarding the immediate use of the taxonomy and the risks associated with making such use mandatory for financial market participants before the taxonomy has reached sufficient stability and maturity. The proposed legal text, based on the final and revised impact assessment, addresses this concern as follows:
• A number of provisions in this proposal ensure that the taxonomy will only be used once it is stable and mature, in order to avoid disproportionate costs on financial market participants. T he aim of these safeguards is that the use of the taxonomy will only come at the end of a consultative process with stakeholders which has created buy-in and a good understanding of the concept:
— Article 18 lays down that the operational part of this regulation (articles 3 to 12) will enter into application six months after the entry into force of the delegated acts. This means that financial market participants will not be required to apply the criteria for environmentally sustainable economic activities until they have had suff ic ie nt ti m e to prepare for and familiarise themselves with the rules and their application.
— Financial market participants who market financial products as environmentally sustainable will be required to provide appropriate disclosure. However, this proposal ensures that relevant disclosure obligations are such that they do not place a disproportionate burden on relevant financia market participants. Article 4 requires the disclosure of the way in which and the extent to which criteria determining the environmental susta inability of an investment, as laid out by the taxonomy, were taken into account in investment decision - m aki ng processes. The delegated acts will specify the exact scope of this disclosure obligation, based on a thorough impact assessment.
— Administrators of low-carbon or positive carbon impact benchmarks will be able to design their methodologies and the related disclosure obligations without being obliged to use the taxonomy, which will constitute only a reference for the selection of the benchmarks underly ing assets.
Third, the RSB was concerned about the way in which the six environmental objectives of the taxonomy, as laid out in article 5, will be op erati ona li sed, particularly with regards to the notion of do no harm and its interaction with existing Union legislation, as well as the notion of contributing substantially to sustainability . A related concern was potential issues of distorting competition when stipulating heterogeneous criteria for different sub-sectors. These concerns were reflected in the impact assessment and the legal text addresses them as follows:
• The recitals emphasise that the delegated acts determining the technical screening criteria for each of the six environmental objectives will be thoroughly impact assessed. The empowerment to the Commission sets out that both sets of criteria — those fulfilling the do no harm requirement and those which determine an activity's substantial contribution to susta in abi lity - will be addressed together in single delegated acts for each of the six objectives.
• Article 14(1)(d) requires that the development of the technical screening criteria takes into account any relevant existing EU legislation.
• Article 14(1)(h) requires that the technical screening criteria acknowledge the risk of stranded assets and the potential impact of the proposed measures on market liquidity. These risks, as well as any possible risks of providing inconsistent incentives, will be rigorously assessed when developing the technical screening criteria as part of the delegated acts, described in article 14.
• Article 14(1)(i) sets out that the delegated acts will be developed objective by objective, for all relevant sectors, in order to not distort competition Recital 27 supports this provision.
• Article 18 provides additional safeguards for the use of the taxonomy by financial market participants when deferring the application of the operational provisions in this regulation. This ensures that additional obligations are not imposed on financial market participants until sufficient clarity on the content of the taxonomy and compliance with it are in place.
The proposal is in line with the conclusions of the impact assessment on the preferred option. The general policy alternatives examined in the impact assessment consisted of the following options:
• no EU action (Option 1)
• EU environmental taxonomy with a medium degree of granularity (Option 2)
• EU environmental taxonomy with a high degree of granularity (Option 3)
Under the first option, market-led or market-based initiatives with different scopes are likely to be further developed and compete with classifications developed by public bodies in the future (e.g. the EIB) and hence no coherent and univocal classification system on sustainable activities in the medium to long-term will emerge. This is likely to limit the possibility of redirecting capital flows towards s usta in abi lity goals. Option 2 foresees, on the other hand, the identification of six EU environmental objectives and the identification and classification of economic activities (grouped by macro-sectors, sectors and sub-sectors) that contribute unambiguously to any of them. However, the lack of more granular technical screening criteria raises doubts about (i) how green the taxonomy under option 2 really is (as it might favour economic activities in a sub-sector defined as green even if they have poor environmental performance) and (ii) what the contribution is to a given EU environmental objective (e.g. the lack of measurable impacts also makes the collection and monitoring of data more difficult).
Option 3 — which instead foresees the development of technical screening criteria specific to sub-sectors and the EU environmental objective the sub-sectors contribute to — is the preferred option as it provides full clarity on which activities are environmentally sustainable by also overcoming the main shortcomings identified under the less granular taxonomy (Option 2). In terms of economic impacts, a uniform classification at EU level would help to determine which activities can be regarded as sustainable and send appropriate signals to economic actors, as it would translate EU policy objectives into tangible guidance to identify the relevant projects or investments. It could therefore help orient more capital flows towards sustai nable investments. This regulation is an im portant first step towards providing clarity on what constitutes a sustainable investment, but the taxonomy itself will be developed through delegated acts. The im pacts on sta keholders depend on the final uses of the taxonomy and on the details of the taxonomy. In terms of costs, developing such a taxonomy will take time and
resources, which will also have an impact on the EU budget (see budgetary implications section below).
In terms of environmental impacts, once operational, the EU taxonomy is expected to have a positive indirect environmental impact in the EU. Through providing clarity on what is ‘green’, it would facilitate investments in sustainable projects and assets across the EU. This would contribute to the achievement of the EU environmental goals e.g. lowering greenhouse gas emissions in line with the Paris Agreement, and moving to a resource-efficient and circular economy. The additional investments resulting from increased transparency and market harmonisation could help to ensure the far-reaching sustainable transformation envisaged by the environmental policies already in place at EU and Member State levels. Investments in green sectors (e.g. renewable energy, energy efficiency, waste management, environmental restoration) would thus translate into immediate and longer term environmental benefits such as reduced pollution levels (e.g. to air, water and soil) with related health benefits, reduced greenhouse gas emissions mitigating dangerous climate change and the preservation and enhancement of natural capital and eco-system services.
In terms of social impacts, as the proposal contains minimum safeguards including on social aspects, some positive minimum social impacts are also to be expected. More important social impacts could be expected once the proposed initiative is reviewed to eventually cover social objectives and socially sustainable activities as per the review clause.
• Fundamental rights
The proposal respects the fundamental rights and observes the principles recognised by the Charter of Fundamental Rights of the European Union given the obligation that the identified environmentally sustainable economic activity has to be carried out respecting some minimum social and governance safeguards.
4. BUDGETARYIMPLICATIONS
The proposal includes an article on the creation of a Platform on Sustainable Finance. This Platform will assist the Commission in the progressive development and the update of the EU classification system. It will carry out other tasks necessary to achieve the objectives of the sustainable finance action plan, and particularly advise the Commission on the need to amend the framework set out by this proposal. It will also be tasked to monitor and report regularly to the Commission on capital flows towards sustainable investment.
The European Supervisory Authorities (ESAs) will play a key role in the development of the EU sustainability taxonomy to ensure that it is usable by financial institutions, applicable to financial products and compatible with the EU financial legislation. The ESAs will play an important role in ensuring that the EU sustainability taxonomy is developed in such a way that it is useful for climate scenario analysis and, at a later stage, for climate stress testing. In order to accomplish these and other tasks, each authority would need 1 additional full-time employee as of 2020 when the different provisions of the proposal are expected to enter into application.
It should be noted that any budgetary demands from the ESAs will still be subject to all accountability and audit mechanisms put in place in the ESAs' Regulations for the preparation, adoption and execution of their annual budgets. Moreover, the annual decision on the EU balancing contribution to the ESAs and their establishment plans (e.g. decision on the staffing level) would still be authorised by the European Parliament and the Council, and subject to discharge from the European Parliament on a recommendation from the Council.
The European Environmental Agency (EEA) will also be closely involved in the sustainable finance work, in particular by providing its technical knowledge in various environmental areas to develop and maintain the EU sustainability taxonomy for all climate-related and environmental issues. The EEA will also collect and provide data on investment needs and flows in EU Member States as part of the Sustainable Finance Observatory, and provide advice to EU Member States in order to develop their low-carbon and sustainable investment strategies. In order to accomplish these and other tasks, the EEA would need 2 additional fulltime employees as of 2020.
The European Commission will be responsible for managing the Platform (e.g. organising its meetings and meetings of any sub-groups, reporting on the outcome, preparing legislative proposals, liaising with the ESAs and the EEA, maintaining an IT collaborative tool, reimbursing experts, performing other secretarial tasks, etc). In order to accomplish these and other tasks, the European Commission would need 10 full-time employees as of 2020 (8 AD and 2 AST).
The financial and budgetary impact of this proposal is explained in detail in the legislative financial statement annexed to this proposal.
It should be noted that the information provided in the legislative financial statement is compatible with the post-2020 MFF proposal.
5. OTHERELEMENTS
• Implementation plans and monitoring, evaluation and reporting arrangements
The uniform criteria for determining environmentally sustainable economic activities will be developed and operationalised through subsequent delegated acts, which will define the technical screening criteria. Those delegated acts will be duly impact assessed. The development of the technical screening criteria will take into account, in particular, their impact on competition within and between industries, on existing green financial products and markets, and on liquidity in financial markets as well as potential risks of delivering inconsistent incentives.
Evaluation and reporting is foreseen every three years after the entry into application of this Regulation. The Commission is to publish a report on the application of this Regulation, evaluating the progress on its implementation to develop technical screening criteria for environmentally sustainable economic activities and the possible need to revise the criteria set out in this Regulation for considering an economic activity environmentally sustainable.
The Commission should also assess whether it is appropriate to set up a verification mechanism to verify compliance with the application of the criteria for determining the environmental sustainability of an economic activity.
Finally, the Commission should evaluate whether it is appropriate to extend the scope of this Regulation to cover other sustainability objectives, in particular social objectives, as well as the use of the common notion of environmentally sustainable investment in Union law, and at Member State level.
Any future Commission legislative proposals providing for the binding use of the EU classification of environmentally sustainable activities in further areas will be subject to impact assessments, in line with the Better Regulation principles.
The Commission is required to forward its report to the European Parliament and to the Council. The Commission is required to make proposals to amend this Regulation as appropriate.
• Detailed explanation of the specific provisions of the proposal
Article 1 sets out the subject matter and the scope of this Regulation.
This proposal establishes the framework to set out uniform criteria to determine the environmental sustainability of an economic activity, exclusively for the purposes of determining the degree of sustainability of an investment.
This proposal provides the basis to establish the environmental sustainability of economic activities, rather than that of companies or assets. Therefore it does not harmonise the methodology to determine the environmental sustainability of an investment in certain companies or assets. However, the uniform criteria for environmentally sustainable activities will permit to determine the degree of environmental sustainability of a given company, for the purposes of investment. If a company performs only environmentally sustainable activities, the investment in this company is deemed environmentally sustainable. Thus, a share of this company will be an environmentally sustainable asset. Those companies that perform several activities and only some of them are environmentally sustainable, may have different degrees of environmental sustainability, that can be determined, for instance, based on the proportion of turnover that originates from sustainable activities as compared to other activities. The assets that are used to finance only the environmentally sustainable activities of the company (e.g. certain types of bonds) will be considered environmentally sustainable investments, while other assets may have a different degree of environmental sustainability. The degree of environmental sustainability can similarly be determined for investment portfolios consisting of several companies, which will incentivise investments into environmentally sustainable economic activities, without penalising or creating disincentives for investments into other economic activities.
This Regulation applies to Member States and the Union in the context of marketing requirements for market actors and the offering of financial products or corporate bonds pursuing environmental objectives, in particular in the context of labelling.
This Regulation does not establish a label for sustainable financial products. Instead, it provides the framework to set out the criteria that need to be taken into account when setting up such labels at national or EU level. Thus, this Regulation does not prevent Member States from keeping in place, or further developing, labelling schemes – as long as they comply with the criteria set out here for environmentally sustainable economic activities.
In the future, if a label for financial products is developed under the Ecolabel Regulation, already existing national labelling schemes can co-exist with that Ecolabel, provided they comply with the conditions set out in Article 11 of the Ecolabel Regulation.
This proposal is linked with the proposal for a Regulation on improving sustainability disclosures [Commission proposal for a Regulation on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341].
This Regulation requires those financial market participants that are subject to the disclosure obligations set out in the proposed Regulation on improving sustainability disclosure referenced above (e.g. fund managers) to disclose the degree of environmental sustainability of those financial products that they claim pursue environmental objectives.
If a fund manager offers a fund claiming it is a green fund, then for that particular fund the manager will have to indicate the way and the extent to which the criteria for environmentally
sustainable economic activities were used to determine the environmental sustainability of the investment in the fund's pre-contractual disclosure document.
The scope of this obligation will be specified by delegated acts once the technical screening criteria for environmentally sustainable activities are developed.
This disclosure obligation will help investors better understand the degree of environmental sustainability of a financial product, and better compare them before making their investment decisions.
This Regulation sets out provisions framing the process for the development of the technical screening criteria underpinning the establishment of the EU classification of environmentally sustainable economic activities.
It provides for a gradual entry into application of the Regulation only once the classification’s criteria for each environmental objective are sufficiently mature and stable, allowing for a consultative process with stakeholders to create buy-in and a good understanding of the concept among relevant financial market participants.
Article 2 contains the definitions of terms used in this Regulation.
The definitions of financial market participants and of financial products are those set out in the proposal for a Regulation on improving sustainability disclosures.
Article 3 sets out the criteria for determining the environmental sustainability of an economic activity, for the purpose of establishing the degree of environmental sustainability of an investment. Those criteria require that the economic activity contributes substantially to one or more environmental objectives and does not significantly harm any of the others. Recognising the principles enshrined in the European Pillar of Social Rights, they also require that the economic activity is carried out in compliance with minimum social and labour international standards.
Once the Commission specifies, via delegated acts, the technical screening criteria for determining what constitutes a substantial contribution to an environmental objective and what constitutes substantial harm to other objectives, those criteria also apply.
Article 4 establishes obligations on Member States and financial market participants to use the criteria set out in Article 3 in specific cases.
It provides that both Member States and the Union use the uniform criteria for environmentally sustainable economic activities when setting out the requirements for marketing financial products or corporate bonds as environmentally sustainable, in particular in the context of labelling schemes (e.g. for green bonds). It sets out a disclosure obligation on asset managers and institutional investors offering financial products, which are marketed as environmentally sustainable or as investments with similar characteristics, the scope of which will be further specified in the Commission’s delegated acts.
In accordance with article 18, these obligations will become applicable only once the Commission specifies the technical criteria to be used to determine when an activity contributes substantially to a given environmental objective and does not cause significant harm to the other objectives.
Article 5 establishes that for the purpose of this Regulation, the environmental objectives are the following: 1) climate change mitigation; 2) climate change adaptation; 3) sustainable use and protection of water and marine resources; 4) transition to a circular economy, waste prevention and recycling; 5) pollution prevention and control; (6) protection of healthy ecosystems.
Articles 6 to 11 further define the criteria for a substantial contribution to each environmental objective.
The Commission is empowered to adopt delegated acts to specify technical screening criteria for what qualifies as a substantial contribution to a given environmental objective for a given economic activity and what is considered to cause significant harm to other objectives.
Each article indicates the date of adoption of the relevant delegated act, so to provide for the progressive development of the EU classification based on the technical screening criteria. Those related to climate change mitigation and adaptation will be adopted first (by December 2019). Those related to the other objectives will be progressively established and applied by December 2021 (transition to a circular economy, waste prevention and recycling as well as pollution prevention and control) and by December 2022 (sustainable use and protection of water and marine resources and protection of healthy ecosystems).
Article 12 sets out the details for the criteria for determining when an economic activity harms any environmental objective significantly.
Article 13 sets out minimum safeguards by reference to the principles and rights set out in the eight fundamental conventions identified in the International Labour Organisation’s
on Fundamental Rights and Principles at Work.
Article 14 further frames the Commission empowerment by setting out the requirements for the technical screening criteria to be established by delegated acts.
In particular, it requires that those criteria build on standards and labels which exist already at Union level, setting out environmental sustainability criteria in other contexts (such as product labelling, environment protection, etc). As those standards do not automatically translate into investable assets, the technical criteria should operationalise them for the purposes of investments.
Those criteria should also take into account the requirements set out in existing EU legislation, in particular to determine the minimum requirements that needs to be met to avoid significant harm to an environmental objective. This implies an assessment of whether or not existing requirements are sufficient to that purpose.
The technical screening criteria should be practicable, easy to apply, and verifiable within reasonable cost-of-compliance boundaries, and provide for sufficient legal clarity.
When establishing the technical screening criteria, the Commission should assess the use of possible different eligibility criteria per economic sector and subsector, and should strive to ensure that the ease with which an economic operator could engage in an activity that would be considered sustainable, is largely the same by sector.
The Commission should also take into account the potential impact of these criteria on the valuation of those assets that until the adoption of the technical screening criteria were
considered as green assets under existing market practices. It should assess whether these criteria for sustainable activities would give rise to stranded assets and the risk that certain assets lose value as a result of the transition to a more sustainable economy, as well as the risk of delivering inconsistent incentives.
The technical screening criteria should also take into account impacts on market liquidity and competition.
Article 15 requires the Commission to establish a Platform on sustainable finance consisting of experts, which shall advise the Commission on the technical screening criteria. The Platform will take the form of a Commission expert group established in accordance with the Horizontal rules on expert groups, and will replace the expert group previously put in place with similar tasks.
exercise of the delegated powers.
Article 17 contains a review clause, requiring the Commission to publish a report evaluating the implementation of this Regulation and the possible need to amend it by 31 December 2021 and every three years thereafter.
Article 18 sets out the date of entry into force and direct applicability of this Regulation.
It defers the applicability of the Regulation to a date posterior to the adoption of the delegated acts establishing the technical screening criteria, for each environmental objective. Thus, in respect of each of the environmental objectives, the provisions related to each environmental objective will become applicable only six months after the technical screening criteria are established, in order to give the market players that are concerned sufficient time to prepare.