Below is a round-up of selected updates on developments in Europe of ESG regulations and policies. Please note that this list is not comprehensive and may not include all such developments that may be relevant to your business.

In this edition we concentrate on Sustainable Finance. Please contact us for specific legal advice and assistance.

Sustainable Finance

1. New Sustainable Finance Package 2023 (link):

Since 2018, the EU is building out a sustainable finance framework to channel private funding towards investments that meet the objectives of the European Green Deal. The following has been implemented for this purpose:

(i) The EU Taxonomy – a classification system for economic activities substantially contributing to the EU’s climate and environmental objectives, namely:

• Regulation (EU) 2020/852 of the European Parliament and of the Council (the Taxonomy Regulation (link))
• Taxonomy Regulation Delegated Acts
  • Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that economic activity causes no significant harm to any of the other environmental objectives (the Climate Delegated Act (link))
  • Commission Delegated Regulation (EU) 2021/2178 of 6 July 2021 specifying the content and presentation of information to be disclosed by undertakings subject to Articles 19a or 29a of Directive 2013/34/EU concerning environmentally sustainable economic activities, and specifying the methodology to comply with that disclosure obligation (the Disclosure Delegated Act (link))
  • In each case as amended by Commission Delegated Regulation (EU) 2022/1214 of 9 March 2022 amending the Climate Delegated Act as regards economic activities in certain energy sectors and Delegated Regulation (EU) 2021/2178 as regards specific public disclosures for those economic activities (link)

(ii) Disclosures and reporting rules for both companies and investors, to ensure proper transparency

(iii) Tools (standards and labels)

On 13 June 2023, the European Commission published a new package of sustainable finance measures. The package includes the following proposals:

• Draft “Environmental Delegated Act” to the Taxonomy Regulation:

An additional delegated act to the Taxonomy Regulation, a draft of which was first published for public consultation on 5 April 2023, and which set out the technical screening and do no significant harm (DNSH) criteria for the four remaining non-climate related environmental objectives, which are:

• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems

This draft was subject to public consultation until 3 May 2023.

Following public consultation, the European Commission published a draft of the Environmental Delegated Act, which has now been approved in principle by the EC on 13 June 2023 (draft and annexes accessible via this link).The draft prioritizes economic activities and sectors identified as “having the biggest potential to make a substantial contribution to one or more of the above four environmental objectives”. These are manufacturing, water supply, sewerage, waste management and remediation, construction, civil engineering, disaster risk management, information and communication, environmental protection and restoration and accommodation activities.

We published a client insight on the above development with regard to the real estate sector here: link.

• Targeted amendments to the Climate Delegated Act and Disclosure Delegated Act to the Taxonomy Regulation: To complement the draft Environmental Delegated Act, the European Commission published a draft of targeted amendments to the Climate Delegated Act. The targeted amendments expand on economic activities that can contribute to climate change mitigation and adaptation, in particular, the manufacturing and transport sectors, which were not included so far. Targeted amendments to the Disclosure Delegated Act are proposed to provide time for companies to assess compliance with the criteria for new economic activities, and facilitate their reporting, in particular in cases where an economic activity may contribute to several environmental objectives (e.g. building renovations substantially contributing to climate change mitigation and circular economy). (The drafts and related annexes can be accesses through this link.)

• Proposal for a regulation of ESG ratings providers (link): The European Commission published a proposal for a regulation of ESG rating agencies. The proposal introduces the following:

• ESG rating providers offering services to investors and companies in the EU are to be authorized and supervised by the European Securities and Markets Authority (ESMA), which will have the power to impose measures, fines and periodic penalties.
• Organisational structure requirements to prevent and mitigate potential conflicts of interests; ESG rating providers should ensure their ESG ratings are independent, objective and of adequate quality.
• Transparency requirements for ESG rating providers to disclose information to the public, on the methodologies, models and key rating assumptions that they use in their ESG rating activities and in their ESG ratings product and to disclose more detailed information to the subscribers of ESG ratings and the rated entities on the methodologies, models and key rating assumptions. The proposal does not intend to harmonize the methodologies used for ESG ratings, but to increase their transparency.

Next Steps: The Commission will now engage in discussions with the European Parliament and Council.

2. Sustainable Finance Disclosure Regulation (SFRD) (link):

• On 17 February 2023 the Commission published Delegated Regulation (EU) 2023/363 of 31 October 2022 (link) amending and correcting the regulatory technical standards (RTS) in Delegated Regulation (EU) 2022/1288 by adding specific disclosures under the SFDR around financial products’ exposure to investments in fossil gas and nuclear energy activities. This Delegated Regulation came into force on 20 February 2023. These disclosures are intended to inform investors’ investment decisions.

• On 12 April 2023, the three European Supervisory Authorities (EBA, EIOPA and ESMA – ‘ESAs’) published a Joint Consultation Paper on the Review of SFDR regarding the Principal Adverse Impact (PAI) indicators and financial product disclosures (link) proposing amendments to the SFDR Delegated Regulation. The ESAs propose the following changes:

• Extending the list of social indicators for PAIs (the ESAs used the first set of draft ESRS to define potential new social indicators)
• Refining the content of a number of other indicators for adverse impacts and their respective definitions, applicable methodologies, metrics and presentation
• Amending decarbonization (GHG emissions reduction) targets
• Additional changes to DNSH disclosure design options, simplification of the disclosure templates and other technical adjustments

The ESAs welcome comments on the Consultation Paper until 4 July 2023 via the response form (link). On 6 June 2023 the ESAs held a public hearing, presented their proposals and answered stakeholders’ questions about the draft amending RTS and revising the disclosures under the SFDR.

3. European Green Bonds Standard (EuGB)

On 28 February 2023, the EU Council and Parliament reached a provisional agreement on the creation of a the EuGB regulation to establish a uniform standard for bonds issued under the designation “European Green Bond” or “EuGB” – link.

Key points:

• All proceeds of EuGBs will need to be invested in economic activities aligned with the EU Taxonomy, with a flexibility pocket of 15 percent for sectors not yet covered by the technical screening criteria.
• The standard will be voluntary meaning the provisions will only apply to issuers of bonds who wish to use the designation “European Green Bond” or “EuGB” for their environmentally sustainable bonds.
• Development of the disclosure templates planned under the regulation will be used on a voluntary basis by all green/sustainability-linked bond issuers.

We held a webinar on 2 May 2023 on the topic of what an in-house lawyer needs to know about ESG bonds, a recording of which you can find through this (link) (Dentons - ESG webinar insights).

For comments, questions and follow up reach out to: ESGandSustainability.Europe@dentons.com.