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EU Sustainable Finance Package – asset managers and large portfolio companies

EU Sustainable Finance Package – asset managers and large portfolio companies

Overview

The European Commission has issued a Sustainable Finance Package comprising the EU Taxonomy Climate Delegated Act and the legislation integrating sustainability risks into the Alternative Investment Fund Managers Directive Delegated Regulation, the MiFID II Delegated Regulation and Delegated Directive and the UCITS Delegated Directive. 

In addition, the European Commission has issued a proposal for a Corporate Sustainability Reporting Directive with additional sustainability reporting requirements for large and listed companies.

The Sustainable Finance Package does not address the Sustainable Finance Disclosure Regulation (SFDR) and therefore does not provide any insight into the areas of uncertainty previously identified regarding the interaction between the Taxonomy Regulation and the SFDR.

We take a high-level look at the measures in the Sustainable Finance Package below.

EU Taxonomy Climate Delegated Act

The EU Taxonomy Climate Delegated Act (Delegated Act) sets out detailed technical screening criteria for determining whether an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and whether that economic activity causes no significant harm to any of the other environmental objectives in the Taxonomy Regulation.  The Delegated Act will apply from 1 January 2022

Climate change mitigation and climate change adaptation are two of the environmental objectives in the Taxonomy Regulation.  A further Taxonomy Climate Delegated Act will be issued in due course in respect of the remaining four environmental objectives.

We previously discussed the draft Delegated Act in our 2021 New Year Briefing.  The Delegated Act is reported in the press as having raised some concerns from EU member states, particularly around the scope of activities to be included.  Some important energy sectors such as nuclear energy and natural gas are generally outside the scope of the Delegated Act and the decision has also been taken to exclude the agricultural sector for the moment.  These additional areas are currently being examined further by the European Commission and are expected to be addressed in a complementary Delegated Act due later in 2021.

According to the Questions and Answers accompanying the EU Sustainable Finance Package, the Delegated Act will be subject to regular review and will evolve over time with additional activities being added to its scope by means of amendments.

The Delegated Act will be formally adopted by the Commission at the end of May and will enter into force following a period of scrutiny by the European Parliament and the European Council.   This scrutiny period is four months but can be extended by another two months.  Affected firms may, nevertheless, wish to start assessing what proportion of their portfolios will comply with the technical screening criteria.

The Delegated Act will not be adopted in the UK. The UK is committed to a UK version of the Taxonomy, but at this stage it is not clear whether, or to what extent, the UK will adopt the same detailed rules as are in the EU version. 

Amendments to MiFID II, AIFMD and UCITS Directive

Final versions of the legislation to amend the Alternative Investment Fund Managers Directive Delegated Regulation, the MiFID II Delegated Regulation and Delegated Directive and the UCITS Delegated Directive have also been issued (Amending Legislation).

The Amending Legislation will require Alternative Investment Fund Managers, UCITS management companies and MiFID investment firms (including portfolio managers and adviser/arrangers) to integrate sustainability risks and factors into their policies and procedures. 

We previously discussed the draft versions in our 2021 New Year Briefing and the Amending Legislation largely reflects those drafts.

The Amending Legislation is subject to scrutiny by the European Parliament and the European Council (during a three-month period which can be extended by an additional three months).  Assuming a straightforward adoption process and publication in the Official Journal, the Amending Legislation is expected to apply from around October 2022.

The Sustainable Finance Package also includes legislation amending Solvency II and other insurance legislation on a similar basis.

It remains unclear whether the UK will adopt similar measures.

Corporate Sustainability Reporting Directive

The European Commission has also adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD) which would amend a number of existing pieces of EU legislation and largely replace the Non-Financial Reporting Directive.  

The CSRD would apply sustainability reporting requirements to all large companies (whether listed or not) and companies listed on regulated markets (with some exceptions).  Large undertakings are expected to include those exceeding at least two of the three following criteria: balance sheet total of EUR 20,000,000; net turnover of EUR 40,000,000; and/or an average of 250 employees during the financial year. 

The CSRD would also include more detailed reporting requirements based on EU sustainability reporting standards.  The EU sustainability-reporting standards will be drafted by the European Financial Reporting Advisory Group.

There would also be proportionate sustainability reporting standards for small and medium-sized undertakings (SMEs).  Listed SMEs would be able to use these simpler standards to meet their sustainability reporting requirements, while non-listed SMEs could choose to use them on a voluntary basis.

The proposal would also introduce a limited audit requirement for reported sustainability information.

The European Parliament and the European Council will now negotiate the text of the CSRD based on the proposal.  The current timetable envisages the standards to be applied for the first time to reports published in 2024 in respect of the financial year 2023.   This means that, in 2023, many companies will need to consider both the new Taxonomy reporting requirements for the final four environmental objectives as well as the new reporting requirements under the CSRD.

How can we help?

We have been following the EU's sustainability initiatives closely and have been instrumental in industry lobbying efforts.  We have considerable expertise in the new rules and their impact for firms. If you would like to discuss these further then please contact any of the persons below or your usual Travers Smith contact.

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