EU Level Legislation on ESG and Sustainable Financing

EU Level Legislation on ESG and Sustainable Financing

The amended Benchmark Regulation (EU) 2019/2089

Entered into force in late 2019, the amended Benchmark Regulation established the EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-associated disclosures for benchmarks. These amendments aim to ensure that the labels ‘EU Climate Transition Benchmark’ and ‘EU Paris-aligned Benchmark’ are well grounded and easy for investors across the Union to recognize. Also, it aims that only benchmark administrators that comply with the requirements laid down therein should be eligible to use those labels when marketing EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks in the European Union.

Benchmark administrators, except of administrators of interest rate and foreign exchange benchmarks, are obliged to disclose in their benchmark statement whether or not their benchmarks or families of benchmarks pursue ESG objectives and whether or not the benchmark administrator offers such benchmarks.

The Taxonomy Regulation (EU) 2020/852

The Taxonomy Regulation was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020. However, some of its Articles applied from 01.01.2022 and some will apply from 01.01.2023 depending on the environmental objective in question.

It establishes the criteria for determining whether an economic activity is environmentally sustainable for the purposes of establishing the degree of environmental sustainability of an investment. In relation to asset management, the Taxonomy Regulation concerns asset managers under MiFID II, the UCITSD, the AIFMD and the financial products under their management as well as to other EU branded AIFs. As per the relevant provisions, an economic activity shall qualify as environmentally sustainable where that economic activity cumulatively contributes substantially to one or more of the environmental objectives set out in the Taxonomy Regulation; does not significantly harm any of the said objectives; is carried out in compliance with the minimum safeguards laid down in Article 18 of the Taxonomy Regulation, which shall be procedures implemented by an undertaking that is carrying out an economic activity to ensure the alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights; and complies with technical screening criteria that have been established by the Commission as further provided in the Taxonomy Regulation.

Where an individually or collectively managed portfolio invests in an economic activity that contributes to an environmental objective, information, as per the provisions of Article 5 of the Taxonomy Regulation, has to be provided on the environmental objective or environmental objectives to which the said activity contributes; and a description of how and to what extent the investments of the said portfolios are in economic activities that qualify as environmentally sustainable, within the meaning of the Taxonomy Regulation.

In addition to the above, under Article 8 of the Taxonomy Regulation, issuers of financial instruments that are required to publish non-financial information under the Non-Financial Reporting Directive, are required to include information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. To this end, they are required to disclose the proportion of their turnover, capital expenditure and operating expenditure associated with economic activities that qualify as environmentally sustainable.

The Regulation on Sustainability Related Disclosures in the Financial Services Sector (SFDR)  (EU) 2019/2088

The SFDR Regulation is in force from 10 March 2021 and lays down EU-wide harmonised rules for financial market participants and financial advisers on transparency with regard to the integration of sustainability risks, including the consideration of adverse sustainability impacts in their processes and the provision of sustainability‐related information with respect to financial products provided for therein. From an asset management perspective, it applies to the same actors and products as the Taxonomy Regulation. This aims to reduce information asymmetries in principle‐agent relationships with regard to the integration of sustainability risks, the consideration of adverse sustainability impacts, the promotion of environmental or social characteristics, and of sustainable investment. The SFDR aims to achieve this by requiring the financial services professionals determined in this Regulation, to make pre‐contractual and ongoing disclosures to end investors, when they act as agents of those end investors (principals). The sustainability disclosures required under the Disclosures Regulation apply in addition to the pre-contractual and ongoing disclosures already required under the applicable sectoral legislation.

The Non-Financial Reporting Directive (NFRD) 2014/95/EU

The NFRD lays down the rules on disclosure of non-financial and diversity information by large companies. This directive amends the accounting directive 2013/34/EU and inter alia provides that large Public Interest Entities, namely companies listed on a regulated market, banks, insurance companies and other companies designated by national authorities as public-interest entities (PIEs), with more than 500 employees, have to publish annually a non –financial statement  containing  information relating to at least environmental matters, social and employee matters, respect for human rights and anti-corruption and bribery.

The relevant provisions have been transposed into Cyprus law, by means of Articles 151 Α –Β of the Companies’ Law and are already applicable.

In addition, companies listed on a regulated market must provide a description of the diversity policy applied in relation to the company’s board (in terms of age, gender, educational and professional background- Article 151 of the Companies’ Law).

The European Commission issued in 2019 guidelines on climate-related reporting, supplementing the Guidelines on Non-Financial Reporting issued in 2017, pursuant to NFRD, on the disclosure of non-financial and diversity information by certain large companies and groups.

EU is currently working on the following:

• The establishment of a uniform EU Green Bond standard.
• The Draft amendment in MiFID II (by means of amending Delegated Regulation 2017/565), aiming at allowing investors to specify their ESG preference and obliging MiFID firms to take these preferences into account.
• The Draft AIMFD and UCITS amendments, aiming at including sustainability risks and factors in fund management and their investment strategies.