EU Sustainable Finance Package June 2023

Introduction

On 13 June 2023, the European Commission (the 'Commission') published a significant sustainable finance package on EU Taxonomy, ESG ratings and transition finance. 

Expansion of Taxonomy Regulation framework

The Commission has approved delegated acts that create a new set of taxonomy criteria for economic activities now covering all six environmental objectives:

The proposal completes the EU's green taxonomy and includes a new set of taxonomy criteria for economic activities making a substantial contribution to one or more of the following objectives:

• sustainable use and protection of water and marine resources;
• transition to a circular economy;
• pollution prevention and control; and
• protection and restoration of biodiversity and ecosystems.

The legislative proposal including the amendments to climate change mitigation/adaption are in line with the Commission’s consultation in April 2023.

The Taxonomy delegated acts will now be transmitted to the European Parliament and the Council for their scrutiny and are expected to commence application on a phased basis from January 2024.

The EU Taxonomy Compass and Taxonomy Calculator will also be expanded to cover activities under these wider environmental objectives.

FAQs on Taxonomy Regulation and links to the Sustainable Finance Disclosure Regulation ('SFDR')

Secondly, the Commission has published a notice on the interpretation and implementation of certain legal provisions of the Taxonomy Regulation and links to the SFDR.

The notice provides guidance to make the framework more usable containing frequently asked questions covering:

• the role of minimum safeguards in the Taxonomy Regulation;
• how minimum safeguards are defined under Article 18 of the Taxonomy Regulation;
• key expectations for undertakings under Article 18 of the Taxonomy Regulation; and
• whether taxonomy-aligned investments qualify as 'sustainable investment' under the SFDR. The Commission clarifies that investments in taxonomy-aligned environmentally sustainable economic activities can be automatically qualified as sustainable investments under SFDR.

Recommendation on transition finance

The Commission has published a draft recommendation on facilitating finance for the transition to a sustainable economy. The recommendation clarifies the concept of transition finance, linking 'transition' to the Paris Agreement, EU climate neutrality and requiring an assessment be carried out in relation to climate change adaptation and the remaining environmental objectives of the taxonomy. The recommendation provides guidance and examples for companies and the financial sector about transition plans and will be considered by the European Supervisory Authorities and national regulators in supervising greenwashing.

Proposed Regulation on ESG rating activities

The Commission has adopted a proposed Regulation (with Annexes) on the transparency and integrity of ESG rating activities. The proposed Regulation will require ESG rating providers offering services to investors and companies in the EU to be authorised and supervised by ESMA, as well as imposing rules on organisational requirements, qualifications of personnel, record keeping, the prevention of conflicts of interest and disclosure obligations. ESG rating providers that are not categorised as small or medium-sized are expected to apply for authorisation within six months after the date of entry into force.

The Commission's communication entitled 'A sustainable finance framework that works on the ground' helpfully provides an overview on the package of measures. It also signposts a further consultation on assessing the SFDR which will launch in autumn 2023, with additional guidance on taxonomy alignment reporting obligations also expected by the end of 2023.