The Sustainable Finance Action Plan of the European Union was launched on March 8, 2018 in response to the Climate Change emergency and the depletion of resources with an expected expenditure of around € 180 billion per year until 2030, and with the objective of achieving a 40% reduction in greenhouse effect emissions over 1990 figures. In December 2020, the European Council extended this objective to 55%, thus placing the European Union in the path of climate neutrality planned for the year 2050. At least 30% of the funds from the new HorizonEurope framework program and the NextGeneration Europe emergency funds will go to Climate actions.

The aforementioned Action Plan established a roadmap with several initiatives:

  • Establish a common language for sustainable finance, that is, a unified classification system or taxonomy for European Union projects, which classifies sustainable investments by typology and environmental impact.
  • Classify projects and initiatives based on benchmark indicators, in such a way that for each sector or technology we can quickly infer which are the most sustainable initiatives within the specific field (best in class, top 10 …) comparing them with the indexes of reference.
  • Create labels for ‘green’ financial products on the basis of the EU taxonomy: investors will thus be able to easily identify investments that meet green or low carbon criteria.
  • Obligation for fund managers to disclose information related to Sustainability, specifically, potential environmental risks and impacts, in accordance with pre-established procedures. In this sense, insurance and investment companies are obliged to advise their clients based on their preferences in terms of sustainability.
  • Integrate Sustainability into prudential requirements: banks and insurance companies are an important source of external financing for the European economy. The Commission will examine the feasibility of recalibrating the capital requirements applicable to banks (the so-called ‘green supporting factor’) for sustainable investments, where justified from a risk point of view, while ensuring the financial stability.
  • Lastly, increase the transparency of corporate reports: reviewing the guidelines regarding non-financial information to bring them more in line with the recommendations of the Financial Stability Board working group on disclosure of financial information related to climate.

All these initiatives, some of them already very advanced, intend, among other things, to eliminate the so-called “greenwashing” or attempt by some companies to offer a green image without having undertaken the necessary transformations within their organizations. The standardization of procedures, the classification of initiatives or taxonomy and benchmarks (KPIs) will avoid assigning environmental value to those companies or investments that do not deserve it and adequately assess those that have acted correctly.

As of the date of this article, the taxonomy has already been defined, as well as the benchmark indicators and the binding disclosure regulation comes into effect on March 10. Specifically, the so-called Regulation for the Disclosure of Sustainability information in the Financial Services sector.

On December 9, 2019, the Regulation of the European Parliament and of the Council, on the disclosure of information relating to Sustainability in the financial services sector, Regulation (EU) 2019/2088, was published in the Official Journal of the European Union of November 27, 2019. This standard is launched as a result of the commitment made by the European Union in the Green Deal and in the 2030 Agenda whose core is the Sustainable Development Goals (SDG) and enters into force on March 10, 2021 although some provisions will apply as of January 1, 2022.

The objective of the Regulation is, as has been indicated, to establish the transparency rules that financial market advisers (risk capital, investment funds or pension funds) and their investee companies must apply, to integrate risks and Sustainability impacts that could have a material negative effect on the financial profitability of the investment. This information must be available to the public on the websites of the financial advisers (with express mention of the methodology) and in those of the investee companies.

The European Supervisory Authorities (ESA) have developed in great detail in the report “Final Report on draft Regulatory Technical Standards”, the content, the methodology and the presentation of this information with the aim of harmonizing the requirements and ensure sufficient comparability of published data.

Specifically, financial services companies and investees must publish:

  • Adverse environmental and social impacts on investment decisions, including a summary of the policies to identify and prioritize them, the measures adopted to mitigate them, the company’s policies for involvement, adherence to international standards and an annual monitoring of the evolution of parameters or KPIs. If potential adverse events are not considered, the reasons should be clearly explained.
  • Disclosure of ESG (Environment, Social and Governance) indicators in the pre-contractual information of investment funds, where the risks and impacts associated with the sustainability of companies will be included. There is a mandatory model published on February 2, 2021, with a list of elements that must be included and other additional elements for comparison with the benchmarks.
  • Disclosure of ESG indicators on the website of financial services companies. The information must be clear, succinct and understandable and add a list of elements focused on the methodology, the data sources used, and the selection criteria used.
  • Periodic disclosure of ESG indicators on the website of investee companies. Also, through a reporting template with a list of items. In those products with a clear sustainable objective, it must be demonstrated that the maxim of not causing any significant social or environmental damage has been met.

Qi Arrow is a Consulting and R + D + i firm specialized in accompanying companies and administrations in the ecological and digital transition. Qi Arrow manages a Service Platform aimed at the eco-sustainable transformation and digitization of companies and public administrations with direct actions on energy, the environment, mobility, governance, digitization, the management of green grants, training and outreach for a more balanced future world.

The Platform called “Collaborative Ecosystem for Sustainability Rapid Actions ” allows the integration of consultants, engineering firms, advisors and lines of financing into a single repository, allowing traceability, monitoring and disclosure of the transformation process.

From Qi Arrow we can help you implement the Disclosure Regulation in your financial services company and in your investee companies.

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