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Towards an awareness of sustainable finance?
Until recently, climate issues were not among the financial sector’s concerns. Today we are seeing a reversal. The terms sustainable finance, responsible investment and green finance are used by all players in the sector. Greenwashing or genuine awareness? (Greenwashing: the misleading use of arguments claiming good ecological practices in marketing or communication operations.)
The environmental awareness that followed COP 21 in 2015 and the signing of the Paris Agreement, which aims to limit the temperature rise to 1.5 degrees, seem to have highlighted the need for the financial world to play a leading role in the environmental transition. In March 2018 the European Union launched a transition towards a sustainable, low-carbon and more resource-efficient economy, with a specific action plan on sustainable finance. Its main actions aimed to establish a classification system for sustainable activities (taxonomy), create European labels for green financial products, increase corporate transparency on Environmental, Social and Governance (ESG) policy, and regulate low-carbon and positive-carbon-impact benchmarks.
In July 2021 the European Commission adopted a package to raise its ambition on sustainable finance: a new sustainable finance strategy, a proposed EU green bond standard, and a delegated act on the information financial and non-financial undertakings must publish on the sustainability of their activities. These initiatives show a will to evolve policies and strengthen sustainable finance standards. Both ESG issues (environmental, social and governance criteria) and the questions they raise have kept the financial sector busy for many months. The interpretation of the regulatory requirements, their implementation and the divergences of view between regulators do not, however, facilitate the transition. To address these questions, Droitbancaire.be devotes a series of articles to the matter. This first contribution gives an overview of the regulatory context and the requirements imposed by one of the European regulations.
An overview of the European regulatory context
From a regulatory viewpoint, two texts stand out: Regulation 2019/2088, better known as the SFDR (Sustainable Finance Disclosure Regulation), which aims to increase transparency in sustainable finance, and Regulation 2020/852, known as the Taxonomy Regulation, which seeks to build a classification tool to determine whether an activity can be considered sustainable. In addition, Regulation 2019/2089 (the Benchmarks Regulation) aims to allow comparability of the so-called climate benchmarks developed in recent years. Other texts have been or are about to be adopted, notably amendments to six delegated acts to ensure financial undertakings take sustainability into account in their procedures and in the investment advice they give clients. The Commission introduced an assessment of sustainability preferences in the delegated acts relating to MiFID II, the Insurance Distribution Directive (IDD) and the UCITS Directive.
The SFDR: what is it?
The SFDR requires financial market participants to disclose information on the impact of their activities on the environment and how they take sustainability risks into account. It aims to give investors more transparent information on the environmental or social characteristics of financial products and on the sustainability of their investments or objectives. To that end, products are categorised into three main categories according to the importance of the sustainability criterion, each with specific disclosure obligations and investment criteria. These correspond to articles 6, 8 and 9 of the SFDR: article 8 products promote social and/or environmental characteristics and may invest in sustainable investments but have no sustainable investment objective; article 9 products have a sustainable investment objective; article 6 products either integrate ESG criteria into the investment decision process or explain why sustainability risk is not relevant, but do not meet the additional criteria of article 8 or 9.
What obligations fall on financial players?
The SFDR requires entities to disclose at two levels, entity and product. At entity level, the following must be published: the taking into account of sustainability risks (article 3), a sustainability risk being an ESG event or situation which, if it occurs, could have a significant negative impact on the value of the investment; the negative impacts of investment decisions or advice on sustainability factors (the Principal Adverse Impacts) (article 4), sustainability factors being environmental, social and personnel matters, respect for human rights and the fight against corruption and bribery, measured through indicators defined in the Regulatory Technical Standards; and the taking into account of sustainability risks in remuneration policies (article 5).
As regards products (notably (A)CIUs, managed portfolios, insurance-based products), the following disclosure requirements apply: financial products that promote environmental or social characteristics (article 8 products) or that have a sustainable investment objective (article 9 products) include the specific information required by articles 8 and 9 in their prospectus or pre-contractual information; all covered financial products include information on the integration of sustainability risks (article 6) in their management at prospectus or pre-contractual level; advertising documents on these products may not contradict the prospectus or pre-contractual information; and in principle, only products meeting the requirements of article 9 and products meeting those of article 8 use the terminology sustainable investment. Financial institutions must communicate this information notably in pre-contractual documents, prospectuses, financial and periodic reports and on their website.
Why does the SFDR matter?
The European Union, and the whole world, is increasingly confronted with the potentially catastrophic and unpredictable consequences of climate change, resource depletion and other sustainability issues. It is therefore essential to act to mobilise capital and reverse the current trend, and essential that investors make their investment decisions with full knowledge. The increased transparency imposed by the SFDR helps avoid greenwashing and gives investors a means to compare the investment solutions presented to them.
The state of the regulation
The SFDR entered into force on 10 March 2021, from which date the transparency obligations apply to financial market participants and financial advisers. Players or advisers belonging to a group with more than 500 employees (the large players) had to describe their method of taking Principal Adverse Impacts into account from 30 June 2021. To complement the SFDR, the European Supervisory Authorities (ESAs) were tasked with drafting RTS detailing and completing several articles (definitions, article 8 on the transparency of environmental or social characteristics in pre-contractual disclosures, article 9 on sustainable investments, article 10 on website disclosures, and article 11 on periodic reports). The draft RTS on articles 8, 9 and 11 were submitted to the Commission on 22 October 2021. The Commission had three months to adopt them; although it initially wished to combine all the RTS in a delegated regulation entering into force on 1 July 2022, it later announced that the effective date would be postponed to 1 January 2023.
First conclusions
This brief overview allows a first observation: the European legislature appears to have grasped the need to intervene to foster the emergence of sustainable finance. However, the multitude of texts adopted or proposed, their entanglement (which we will analyse in a future contribution) and the difficulty of taking implementing measures do not facilitate the transition to a greener economy. And yet the stakes are high, and the financial sector must respond to them.
This article is a translation and a condensed version. Only the French version is authoritative. It is provided for information purposes and does not constitute legal advice.
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