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Sustainable Finance

(Last updated: 25.06.2020)

In December 2019 the European Commission presented the European Green Deal. Herein the European Union stated it would become the first climate-neutral economic area by 2050. The financial sector will play a key role in the implementation of this plan. In order to implement the Green Deal considerable investment is planned with which (private) capital for environmentally friendly projects in the whole of Europe will be mobilised. 

In recent years the market for sustainable investments has developed rapidly and further new products will be added. For example, there has been rapid growth in green financial products, e.g. Green Bonds, whose issue proceeds may only be used for green sustainable purposes in recent years. 

In the financing sector in addition to the green loans - where the funds must be used to finance green projects - also "Sustainability Linked Loans" have taken increasing control of the German financial market. The use of loans here is not restricted to green purposes. Instead, the financing costs are linked to the sustainability performance of the borrower. 

However, so far there is no sector-wide uniform understanding of sustainable investments. Although standards and recommendations have developed to some extent in the market (e.g. the Green Bond principles of the International Capital Market Association (ICMA) or the Sustainability Linked Loan Principles of the Loan Market Association (LMA)), there is no legislation yet. Now the EU is adopting a legislative package for sustainable investment one of the aims of which is to harmonise the term "sustainability". In the following please find a brief overview of the regulatory projects:

Taxonomy Regulation

The core of the legislative package is the taxonomy for sustainable economic activities (Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment and amending Regulation (EU) 2019/2088 ("Taxonomy Regulation")). This bindingly stipulates the environmental sustainability of an economic activity. Given the growing market for green financial products the development of a uniform definition will among other things counter the risk of "Green Washing". The Taxonomy Regulation applies to EU Member States, financial market participants which offer financial products and undertakings which are obliged to publish a non-financial statement. 

On 18 June 2020 the Taxonomy Regulation was adopted by the European Parliament. The Regulation will enter into force on 12 July 2020 (20 days after publication in the Official Journal of the European Union). 

By 31 December 2020, the Commission shall establish the so-called technical screening criteria for determining the environmental objectives of climate mitigation and climate change adaption set out in the Taxonomy Regulation by means of delegated acts. The respective delegated acts shall come into legal effect on 1 January 2022. 

With regard to the other environmental objectives (sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control and the protection and restoration of biodiversity and ecosystems), the delegated acts are to be adopted by 31 December 2021 in order to enter into force on 1 January 2023.

Disclosure Regulation

The 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 ("Disclosure Regulation") obliges institutional investors and asset managers to disclose the extent to which sustainability risks are factored in to the investment decision process. By harmonising the information to be disclosed end investors will be able to compare financial products. 

The Disclosure Regulation came into force at the end of December 2019. The most important provisions are applicable from March 2021.

Benchmark Regulation

The Regulation (EU) 2019/2089 amending Regulation (EU) 2016/2011 as regards EU Climate Transition Benchmarks EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks  (Benchmark Regulation) will provide a harmonised legal framework for low-carbon benchmarks already on the market. Two new categories for benchmarks will be introduced: i) EU Climate Transition Benchmarks and ii) benchmark which is referred to as the EU Paris-aligned Benchmark. This gives rise to the following requirements:

EU Climate Transition Benchmarks are selected so that the resulting benchmark portfolio is on a decarbonisation trajectory. For EU Paris-aligned Benchmarks the assets are selected, weighted or excluded in such a way that the CO² emissions from the resulting benchmark portfolio are tailored to the more ambitious targets of the Paris Climate Agreement. The new provisions also stipulate that the administrators must disclose in their benchmark statements to which extent their benchmarks pursue ESG objectives. 

The Benchmark Regulation entered into force on 10 December 2019. The most important duties apply with effect from 30 April 2020.

Environmental, Social and Governance - ESG

Timeline: Planned regulatory projects and other relevant events

Sustainable Finance - ESG-Timeline

 

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