Preparing the finance industry for ESG
In March 2018, the Commission published its Action Plan on sustainable finance, built upon the group’s recommendations. The framework aims to set out an EU strategy for sustainable finance, as part of the broader efforts to connect finance with the specific needs of the European and global economy for the benefit of the planet and our society.
The three main focuses of the Action Plan are:
- reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth;
- manage financial risks stemming from climate change, resource depletion, environmental degradation, and social issues;
- foster transparency and long-termism in financial and economic activity.
Implementing this Action Plan will allow ESG to create value for future generations, shifting to a more sustainable economy!
The importance of the taxonomy regulation to define sustainability
The first goal of the Action Plan poses the question of what ‘sustainable’ means. It is for this reason that the Action Plan introduces the concept of Taxonomy, a classification system that provides a way to identify whether or not a given economic activity should be considered sustainable. This concept was translated into regulation on 22 June 2020. The Taxonomy Regulation applies to financial market participants that offer financial products, financial and non-financial undertakings subjected to the NFRD.
The EU legislative initiatives for ESG to support the Green Deal
The Taxonomy Regulation defines six environmental objectives:
- climate change mitigation;
- climate change adaptation;
- 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.
Pillar 3 disclosures for ESG
The capital requirements regulation (EU) No. 575/2013, as amended in 2019 (CRR2), includes article 449a on disclosure of environmental, social and governance risks. This Article requires large institutions (total assets > 70 bn EUR) which have issued securities that are admitted to trading on a regulated market of any Member State, to disclose information on ESG risks, including physical risks and transition risks. Social and governance risks are also taken into account.