We analyse the European Union's Sustainable Finance Action Plan reviewing its objectives and the new measures proposed, providing answers to the most frequently asked questions.
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The importance of social and environmental responsibility in finance has advanced significantly thanks to international agreements such as the Paris Agreement of the United Nations Framework Convention on Climate Change (UNFCCC) and the creation of the Sustainable Development Goals (SDGs) of the 2030 Agenda.
In the European Union, the increase in sustainable investments is already evident. However, companies and investors face obstacles in this transition, especially in terms of complying with new disclosure and reporting requirements.
This is why the Commission presented in June 2023 new measures to support companies and the financial sector, while encouraging private financing of transition projects and technologies.
In this article, we explore the European Union's Sustainable Finance Action Plan, its objectives and the new measures proposed, resolving the most frequently asked questions.
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Sustainable finance allows the design of various financial products that seek to balance profitability and sustainability. These are investment decisions that take into account the environmental, social and governance factors (ESG criteria) of an economic activity or project.
As part of its climate objectives, the European Commission adopted in 2018 an action plan on sustainable finance that aims to:
1. Reorient capital flows toward sustainable investments to achieve sustainable and inclusive growth.
2. Manage the financial risks arising from climate change, environmental degradation and social issues.
3. Promote transparency and the long term in financial and economic activity.
This action plan was accompanied by a package of measures for its implementation, including the establishment of a classification system ("European Taxonomy").
It came into force in July 2020 and is based on 6 environmental objectives that serve as the basis for defining which activities can be considered sustainable:
From 2022, large companies must provide, on a mandatory basis, information on their alignment with the EU taxonomy (specifically, from January 2022 for the climate change mitigation and adaptation targets and, from January 2023, for the other four environmental targets). This can be done through financial reporting, sustainability reporting or any other means of disclosure. Although this is only mandatory for large companies under the scope of the CSRD (Corporate Sustainability Reporting Directive), small and medium-sized companies can also benefit from voluntarily reporting on their alignment with the taxonomy.
In June 2023, the European Commission presented a new package of measures aimed at increasing transparency in the sustainable investment market and making it easier for companies and investors to use this regulatory framework. These are the main new features of the package:
The proposed regulation published by the European Commission expands the economic activities that contribute to climate change mitigation, not included so far in the European Taxonomy (in particular in the transport and manufacturing sectors). This will make it possible to cover more economic sectors and companies and boost the usability of the taxonomy to increase sustainable investments in the EU.
The new package includes technical assessment criteria from the EU taxonomy for economic activities that contribute to the environmental objectives of "protection and restoration of biodiversity and ecosystems", "sustainable use and protection of water and marine resources", "transition to a circular economy" and "prevention and control of pollution".
As part of the activities included in the "transition to a circular economy" objective and the "pollution prevention and control" objective is the "Water supply, sanitation, waste management and remediation activities".
This activity now includes new activities. We highlight below those that are directly associated with the management of the waste value chain:
ESG (Environmental, Social and Governance) ratings play an important role in the EU sustainable financial market by providing information to investors and financial institutions. The establishment of new rules will allow investors to make better informed decisions regarding sustainable investments.
Among the new obligations for ESG data providers are the need to be authorised by ESMA or ESMA (European Securities and Markets Authority) or its equivalent (in case of being a provider from a non-EU country); design ESG data quality methodologies that are "rigorous, systematic, objective, continuous and subject to validation" and review them at least annually; develop policies, procedures and mechanisms to comply with organisational and governance standards related to this rating activity, etc.
Moreover, ESMA and national competent authorities shall maintain an updated public register with generic information on ESG data providers; supervise the activity of ESG data providers and, where appropriate, impose sanctions.
It should be noted that, for the first time, the Commission identifies four types of ESG ratings currently on the market, associating them with specific agencies. Among these types is the sustainability risk assessment of the supply chain not used for direct investment purposes (EcoVadis).
The key pillars of these new rules are the Sustainable Financial Disclosure Regulation(SFDR) and the Sustainable Corporate Reporting Directive(CSRD).
This new guide will help companies and financial institutions assess their eligibility and alignment with the taxonomy. It adds to the two existing ones: EU Taxonomy Compass (a visual representation of the economic sectors, activities and technical selection criteria included in the delegated acts of the EU taxonomy), and the EU Taxonomy Calculator (a tool to calculate eligibility and alignment ratios with the EU taxonomy).
Recommendations and practical examples are presented for companies and the financial sector to facilitate the financing of the transition and improve their sustainability performance.
It is also recognised that small and medium-sized enterprises face specific challenges that need to be addressed.
The implementation of technological tools such as Zero software supports the planning and establishment of processes for waste data collection, helping to make sustainability measurable and controllable.
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