Sustainable finance package 2023

Following the consultation of the drafts of a set of Delegated Regulations concerning the EU environmental taxonomy, the EC has conducted in-depth discussions with the Platform on Sustainable Finance (PSF) and Member States‘ experts as well as the European Parliament and has carefully examined the feedback. The EC made some targeted calibrations and other technical modifications due to finalising the Delegated Regulations, which were now published as adopted versions as part of a regulatory package to build on and strengthen the foundations of the EU sustainable finance framework:
1. The Delegated Regulation on a new set of EU Taxonomy criteria for economic activities (Environmental Delegated Act) in the sectors of manufacturing, water supply, sewerage, waste management and remediation, construction, civil engineering, disaster risk management, information and communication, environmental protection and restoration activities and accommodation activities. These are considered to contribute significantly to:
a) the sustainable use and protection of water and marine resources;
b) the transition to a circular economy;
c) pollution prevention and control; or
d) the protection and restoration of biodiversity and ecosystems.
2. The Delegated Regulation amending the Taxonomy Climate Delegated Act. The amendments expand technical screening criteria for climate change mitigation and adaptation for additional economic activities not yet included in the act. In particular regarding manufacturing activities related to low carbon transport and electrical equipment, as well as transitional activities in the transport sector where zero-carbon solutions are not yet available. The draft regulation also adds economic activities urgently needing to be adapted to the impacts of climate change to the EU Taxonomy, such as emergency services, flood risk prevention and protection infrastructure, civil engineering, or desalination.
The Delegated Regulations also correct technical inconsistencies in the Taxonomy Disclosures Delegated Act and introduce limited amendments of a technical nature to the technical screening criteria for activities already included in the Taxonomy Climate Delegated Act.
According to the EC, the changes to the final version of the Delegated Regulations concern, „in particular, technical clarifications, alignments to ensure greater consistency with existing sectoral legislation, the inclusion of references to upcoming reviews, as well as alignments to improve the coherence of the ‘do no significant harm’ criteria for several activities“.
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The EC has also published a proposal for a regulation of ESG (Environmental, Social and Governance) ratings providers, which is comprehensively analysed in a separate RISP-Event (please see EventID#21559 for details).
Furthermore, the EC clarified how the EU legal framework can be used effectively to facilitate transition finance and published a corresponding Commission Recommendation on facilitating finance for the transition to a sustainable economy.
In its Communication „A sustainable finance framework that works on the ground“, the EC sets out how it will further promote investment in the green transition to make Europe the first climate-neutral continent and build a sustainable, just and prosperous society, while strengthening the EU’s competitiveness. The accompanying staff working document „Enhancing the usability of the EU Taxonomy and the overall EU sustainable finance framework“ presents the main pillars of the current EU framework, and evaluates the recently adopted measures on usability.
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The EC clarifies in its notice „on the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and links to the Sustainable Finance Disclosure Regulation“, which includes a set of FAQs, the requirements for compliance with minimum safeguards under Article 18 of the Taxonomy Regulation and the status of investments in Taxonomy-aligned economic activities and assets according to Article 2 of the SFDR. Thereby the EC states that:
1. The minimum safeguards ensure that entities aligning with the Taxonomy framework adhere to certain social and governance standards. The inclusion of minimum safeguards aims to prevent activities and investments from being labeled as ’sustainable‘ if they involve breaches of social principles, human and labor rights, or do not meet responsible business conduct standards.
Article 18(1) of the TR defines minimum safeguards as due diligence and remedy procedures implemented by companies carrying out economic activities to align with the OECD Guidelines for Multinational Enterprises (OECD MNEs) and the UN Guiding Principles on Business and Human Rights (UNGP). The OECD Guidelines encompass various areas of responsible business conduct and supply chain management, while the UN Guiding Principles establish a standard of conduct for businesses to prevent human rights violations and address risks arising from their economic activities.
Article 18(2) of the TR establishes a link between the minimum safeguards and the ‚do no significant harm‘ (DNSH) principle of the SFDR. The DNSH principle, detailed in the Delegated Regulation (EU) 2022/1288, requires the consideration of principal adverse indicators. In the context of the TR, these indicators for social and employee matters, respect for human rights, anti-corruption, and anti-bribery are listed in Annex I of the SFDR Delegated Regulation.
Undertakings disclosing their alignment with the Taxonomy must assess compliance with minimum safeguards under both Article 18(1) and Article 18(2). They must also consider the SFDR’s principal adverse impact indicators (PAIs) when conducting due diligence and remedy procedures. The only indicator which is not already covered by the OECD MNEs and the UNGP is the exposure to controversial weapons as defined in the SFDR Delegated Regulation. Therefore, undertakings must ensure that their procedures for identifying, preventing, mitigating or remediating exposure to the manufacture or sale of controversial weapons are effective.
Regarding weapons or defense-related equipment and technologies, the TR does not provide further considerations beyond those in Article 18(2). The EC recognises the importance of access to finance and investment in strategic sectors, including the defense industry (see Question 11 of the Draft Commission Notice), as it contributes to the Union’s resilience, security, peace, and social sustainability. Compliance with Article 18 requirements can be assessed through reporting in line with the Corporate Sustainability Reporting Directive (CSRD), which provides necessary information to investors without requiring additional disclosures.
2. According to the guidance provided, the SFDR DNSH principle and the requirement for good governance practices are fulfilled for investments in Taxonomy-aligned economic activities as they comply with the Taxonomy’s minimum safeguards. The four aspects of good governance mentioned in Article 2 of the SFDR – sound management structures, employee relations, remuneration of staff, and tax compliance (guidance is provided by the EU list of non-cooperative jurisdictions for tax purposes) – are considered satisfied by the provisions in Article 18 of the TR. Therefore, investments in Taxonomy-aligned ’environmentally sustainable’ economic activities automatically qualify as ’sustainable investments’ for product-level disclosure requirements under the SFDR. This implies that investments in specific economic activities can be considered sustainable.
However, if a financial market participant (FMP) invests in an undertaking with some degree of taxonomy-alignment through a funding instrument without specifying the use of proceeds (e.g., general equity or debt), the FMP needs to check additional elements under the SFDR to consider the entire investment in that undertaking as a sustainable investment. Specifically, the FMP must check whether the rest of the economic activities of the undertaking comply with the environmental elements of the SFDR DNSH principle and assess whether they deem the contribution to the environmental objective sufficient.
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Finally, the EC published Q&As concurrent to the regulatory package (please see EventID 21560). The full package of measures is also described in brief in an accompanying Factsheet (please see EventID 21561).
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Figure 1: EU Taxonomy – Economic sectors and activities covered