Understanding the EU Sustainable Finance Package

Earlier this week, the European Commission unveiled a new package of measures to strengthen the EU sustainable finance framework, including a proposal to regulate ESG rating providers and a new set of criteria for economic activities under the EU Taxonomy.

The new package aims to ensure that the sustainable finance framework continues to support companies and the financial sector while encouraging the private funding of transition projects and technologies essential to meet the goals of the European Green Deal, including achieving climate neutrality by 2050. To achieve these goals, the Commission estimates that investments of around €700 billion will be needed annually, with most of them expected to come from the private sector.

Key features of the new package include:

➡ Regulation of ESG Ratings Providers: According to the proposal, ESG rating providers offering services to investors and companies in the EU will need to be authorized and supervised by the European Securities and Market Authority (ESMA). The proposal aims to improve the reliability and transparency of ESG ratings by introducing new organizational principles and clear rules on preventing conflicts of interest and requiring providers to disclose the methodologies, models, and key rating assumptions used in their ESG rating activities. These changes will enable investors to make more informed decisions and provide companies with enhanced clarity on the way they are rated.

➡ EU Taxonomy Delegated Acts: The Commission approved a new set of EU Taxonomy criteria for economic activities that substantially contribute to non-climate environmental objectives:
o   sustainable use and protection of water and marine resources;
o   transition to a circular economy;
o   pollution prevention and control; and
o   protection and restoration of biodiversity and ecosystems.

Amendments were also adopted to expand the scope of economic activities contributing to the objectives of climate change mitigation and adaptation, in particular in the manufacturing and transport sectors.

Improving the usability of the EU Taxonomy is a priority for the Commission and early reporting trends presented by the Commission show that companies in various economic sectors are increasingly adopting the EU Taxonomy as part of their transition efforts. Many large non-financial companies this year are reporting enhanced taxonomy alignment, particularly in terms of capital expenditure.

As part of the new package, the Commission also introduced recommendations on transition finance, providing guidance to stakeholders on the voluntary utilization of tools within the EU sustainable finance framework (the EU Taxonomy, the EU green bond standards, and the EU climate benchmarks) in order to effectively channel investments into the transition and proactively manage climate risks.