New Challenges in the Context of Climate Changes: How to Approach Sustainable Financing?

The EU made another step on the path towards the goals set by the UN 2030 Agenda for Sustainable Development and the Paris Agreement. The EU adopted a new Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector, which came into force on 29 December 2019. What changes will the financial market have to prepare for? How to meet the set objectives? And what will transparency towards investors look like in practice?

Did you know that… The new Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (hereinafter “SFDR”) unifies the conditions for informing end investors in the individual member states? And that it will come into effect on 10 March 2021?

 3 legislative acts that will help implement the objectives

In March 2018, following the UN documents, the European Commission adopted an Action Plan for Financing Sustainable Growth. In this document, the EU aims to ensure reorientation of capital into sustainable investments, integrate sustainability risks into regular risk processes, and increase transparency and focus on long-term goals in the financial sector.

In May 2018, the European Commission proposed three legislative acts to implement measures necessary for achieving the abovementioned objectives, specifically:

  1. Draft Regulation on the establishment of a framework to facilitate sustainable investment (“Taxonomy Regulation”), which prescribes conditions for the gradual creation of a unified classification system (taxonomy). The system will be used to evaluate sustainability of individual economic activities, with its cornerstone being the principles of ‘do no significant harm’ and ‘contribute to environmental goals’. This is the first and crucial point for directing investment flows into sustainable activities, the acceptance of which, among other things, should help limit greenwashing. The final version of the Taxonomy Regulation proposal is already available, but still has to be approved by the European Parliament.2
  2. Regulation (EU) 2019/2089 adopted in March 2019, which amends the benchmark regulation (“Benchmark Regulation”). It introduces two groups of new “environmental benchmarks” that will help investors assess whether their investment activity is a “low-carbon” one, or whether it helps reduce the carbon footprint.
  3. Regulation (EU) 2019/2088 on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/234 (SFDR), adopted in March 2019, prescribes a disclosure obligation to institutional investors and assets managers for information related to sustainability risks. This especially concerns disclosure of information on how obliged entities integrate the environmental, social and corporate governance (“ESG”) factors into their processes. Below, we list the main aspects of this new legal regulation.

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Who will have to reveal their cards? Or who will be affected by the reliefs…

SFRD prescribes new disclosure obligations for financial market participants and financial advisors, including insurance companies providing insurance products with an investment component, investment companies managing portfolios, institutions for occupational retirement provision, pension product manufacturers, alternative investment fund managers, providers of pan-European personal pension products, managers of qualified venture capital funds, managers of qualified social entrepreneurship funds, management companies of a collective investment undertaking, and credit institutions managing portfolios.

The disclosure obligation will be fully applicable to large companies and parent companies of holdings employing at least 500 employees in total. Small businesses employing a maximum of 3 employees will be relieved from the obligation. Other businesses, i.e. companies employing more than 3 but less than 500 employees will have certain reliefs under specific obligations.

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SFDR goals – transparency towards investors as a key feature

SFDR unifies conditions for informing end investors in individual member states. The EU primarily wants to provide a framework to companies, in which they will be able to offer a wide range of financial products and at the same time adhere to the rules of sustainable financing. Transparency is a key feature of the regulation. The disclosure obligation of financial entities will be gradually extended in order for investors to make truly informed decisions. ESG factors and sustainability impact assessment will become a part of everyday processes.

New obligations

  • Disclosure of company policies on the company website: Starting from 10 March 2021, obliged entities will have to publish information on their website about policies that they use to integrate sustainability-related risks into their internal processes and investment or insurance consultancy.
  • Informing clients before concluding a contract: Under the new regulation, before signing a contract, a client needs to be sufficiently informed about how the obliged entity is taking into consideration the possible impacts on sustainability. This information will also have to be regularly updated on the website. Under the Taxonomy Regulation, clients also have to be informed about a potential environmental goal and about how environmental sustainability of underlying investments is achieved.
  • Considering sustainability rules in remuneration policy: The obliged entity needs to integrate information on compliance with the SFDR rules into the remuneration policy as well. This information also has to be published on the website.
  • Informing on sustainability of individual financial products: In the second phase of obligations, companies will have to prepare risk assessment and sustainability evaluation for individual products.
  • Disclosure of information in annual reports: The last step will be the obligation to regularly disclose descriptions of the characteristics of financial products and their impact on sustainability, whether in annual reports or under special rules.

Effectiveness of the SFDR: new obligations from 10 March 2021

The regulation will come into effect on 10 March 2021. Starting from that date, entities will have to disclose information on the integration of risks into their internal policies, fulfil the obligation of informing the client before concluding a contract, and begin the preparation of sustainability descriptions of individual products, which should be available by 30 December 2022 at the latest.

The obligation to disclose information in annual reports will begin on 1 January 2020. Technical standards, which will be issued by the European Supervisory Authorities (EBA, EIOPA and ESMA) by 30 December 2020, will guide the correct implementation. However, it is already clear now that most companies will need to revise their risk assessment processes and adopt new corporate policies. Although the dates from which obligations will have to be fulfilled may seem relatively distant, preparing policies, setting up processes and creating product information will be very time-consuming and should be started as soon as possible.

Would you like to know more about the topic? Are you not sure how to proceed? Let us know – we will help you prepare for the new rules.

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