Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment
On 18 December 2019, the European Parliament and the Council reached an agreement on the Regulation on the establishment of a framework to facilitate sustainable investment, aimed at introducing the world’s first classification system (the so-called green list) for sustainable economic activities (Taxonomy). The Taxonomy Regulation aims to establish a general framework to determine, in a uniform and harmonized manner, which economic activities can be considered environmentally sustainable. The above regulation provides for further delegated acts specifying and developing its standards. The EU, Member States, financial market participants offering financial products (through the obligation to disclose information on how and to what extent the investments underlying their financial product support economic activity that meets all criteria for environmental sustainability), financial and non-financial companies covered by the non-financial reporting will be obligated to use Taxonomy from December 2021. In particular, companies covered by the non-financial reporting will be required to disclose how and to what extent their activities constitute environmentally sustainable activities within the meaning of the Regulation, including the share of revenues from such activities, the share of CAPEX and OPEX expenses. Entities that do not meet the relevant requirements may be exposed to the higher costs of financing their operations and investments. Taxonomy will also be possible to be used on a voluntary basis by other market participants, including entities raising funds for conducting environmentally sustainable activities.
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector introduces uniform requirements as to how institutional investors (such as asset managers, insurance companies, pension funds or investment advisors) should take into account the ESG factors – i.e. environmental, social and corporate governance factors – in the investment decision making process. The exact requirements in this respect will be specified in the delegated acts of the European Commission.
Pursuant to the above regulation, asset managers and institutional investors will have to demonstrate compliance of their investments with the ESG objectives and disclose how these requirements are met. Financial market participants and financial advisors will be required, in their activities, including as part of due diligence, to introduce and continuously assess not only the financial risks, but also risks to sustainable development that could have a significant negative impact on the return on investment or consultancy. Risk for sustainable development means an event or environment, social or management related conditions that, if they occur, could have a significant negative impact on the value of the investment. Financial market participants and financial advisors will also be required to specify in their strategies how they take account of these risks and to publish those strategies, as well as to have procedures to address the major adverse effects of sustainable development risks and to publish information on these procedures on their websites along with a description of the main adverse effects. The assessments of risk for sustainable development should become a part of pre-contractual disclosure by the financial advisers. If it is determined that there are no risks to sustainable development in relation to the given financial product, the regulation introduces an obligation to indicate the justification for such a statement, and where the assessment leads to the conclusion that those risks are relevant, the extent to which those sustainability risks might impact the performance of the financial product should be disclosed, either in qualitative or quantitative terms. The above regulation also establishes a harmonized definition, stating that the companies receiving the investments (investee companies) follow good governance practices and ensure compliance with the precautionary principle – “do not cause significant environmental or social harm”. The regulation applies, in principle, from 10 March 2021 (some of its provisions are to apply from 1 January 2022).
Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks
Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks introduces 2 new categories of low-emission benchmarks:
- a climate transition benchmark to be a low-emission alternative to the commonly used benchmarks,
- a specialized benchmark whose investment portfolios will be in line with the target set in the Paris Agreement stipulating that the global temperature rise should be limited to 1.5˚C in reference to the level before the industrial age.
The new categories are to be voluntary labels to facilitate the choice of investors who want to adopt a climate-friendly investment strategy. They are designed to reflect the carbon footprint of enterprises and provide investors with the information on the carbon footprint of the investment portfolio. The new benchmarks will have a significant impact on the investment flows, including the creation of the investment products, measuring their results and developing an asset allocation strategy. The European Commission has been authorized to adopt delegated acts to specify the minimum standards for the above mentioned benchmarks.
The above regulation imposes an obligation on all benchmark administrators, except for the administrators of the interest rates benchmarks and the currency benchmarks, to disclose in the statement regarding the benchmark whether the benchmarks or groups of such benchmarks meet the objectives of environment protection, social policy and corporate governance, and whether the benchmark administrator offers such benchmarks.
The above-mentioned regulations may affect the conditions for obtaining financing by the TAURON Group.