EU Sustainable Finance: What’s Next?

In March 2018, the European Commission adopted an action plan setting out a comprehensive strategy to further connect finance with sustainability. Several manufacturers and distributors of financial products (including investment firms, insurance undertakings, banks and manufacturers of funds and pension schemes) have accordingly become subject to new or revised obligations in relation to sustainable finance.

One such legislative milestone was the 10th March 2021, whereby financial market participants and advisers were required to make certain disclosures in terms of the Sustainable Finance Disclosure Regulation. In addition, financial sector participants are required to adhere to various other requirements under the sustainable finance regime and the related legislative measures, including the following:

  1. The Taxonomy Regulation establishes the framework by setting out four overarching conditions that an economic activity has to meet in order to qualify as environmentally sustainable. The Regulation came into force in July 2020, followed by the publication of the EU Taxonomy Climate Delegated Act on the 21st April 2021 which is applicable as of the 1st January 2022. The said Delegated Act introduces the first set of technical screening criteria to define which activities contribute substantially to two of the environmental objectives under the Taxonomy Regulation, namely climate change adaptation and climate change mitigation. The criteria will be subject to regular review to reflect developments and technological progress, and updates may therefore be expected. A number of delegated acts on fiduciary duties, investment and insurance advice, and product governance rules, have also been adopted and are expected to apply as of October 2022. The delegated acts are aimed at ensuring that financial firms (including advisers, asset managers and insurers) include sustainability factors in their procedures and advisory services.
  2. As outlined above, the Sustainable Finance Disclosure Regulation (or SFDR) requires financial market participants and financial advisers to make pre-contractual disclosures to investors on how they integrate Environmental, Social and Governance (ESG) factors into their risk and decision-making processes. Whilst the deadline for making such disclosures lapsed on the 10th March 2021, participants are required to ensure continued adherence with the said Regulation when issuing or distributing new products, pursuant to disclosures in pre-contractual documentation, website/s and policy manuals.
  3. Supplements to the Benchmark Regulation have been published with them becoming effective between 2019 and 2024. The supplements regulate how ESG should be factored into benchmarks and methodologies used, and other minimum standards for EU climate transitional benchmarks and EU Paris-aligned benchmarks.
  4. A Corporate Sustainability Reporting Directive is being proposed to amend the current Non-Financial Reporting Directive. In addition to ‘public interest entities’ (listed companies, banks and insurance companies), the Directive shall extend scope to all large companies irrespective of currently applicable thresholds, and will potentially also include SMEs. The Directive introduces more detailed requirements according to EU sustainability reporting standards, the latter to be developed by the European Financial Reporting Advisory Group (EFRAG) and the first set of which is envisaged to be adopted by end of 2022.

Sustainable finance is aimed at re-orientating investment towards sustainable technologies and businesses. The EU Taxonomy and the various related legislative measures are therefore essential steps towards achieving the objectives in the EU’s Green Deal and the aim of reaching net-zero carbon emissions by 2050. The financial sector, including banks, insurance companies, investment firms, fund manufacturers and distributors, and large companies are expected to play a major role in the aforesaid, and accordingly required to pursue substantial measures to comply with the vast Taxonomy framework.

Malta has taken active steps towards sustainable finance. The Malta Financial Services Authority has made sustainable finance a key priority of its Strategic Plan, and also emphasised its willingness to discuss the transition and methodology with policymakers, the industry and financial services users. The Malta Stock Exchange has also established the MSE Green Market to incentivise the listing of Green Bonds on the local capital markets.

DF assists a number of participants within the financial services and capital markets sectors in meeting their obligations in terms of the above, including legal and regulatory advice and assistance in connection with the implementation of the sustainability framework, as well as revisions to pre-contractual documents, public disclosures and policy manuals.

Should you require further information or assistance, please do not hesitate to contact our financial services team at dfcs@dfadvocates.com .

Image credits: MFSA