Stockholm (NordSIP) – On Tuesday, June 8, the European Commission published guidelines on how companies should report climate-related facts. The EU’s executive also welcomed the publication of reports on a taxonomy for environmentally-sustainable economic activities, Green Bond Standards and climate and ESG benchmarks and disclosures guidelines by the Technical Expert Group (TEG) on sustainable finance.
These reports are the latest developments in the EU’s Sustainable Finance Action Plan, which began in March 2018 and aims to clarify and standardise disclosures and definitions in the sustainable finance market at a time of diverse approaches.
“The climate emergency leaves us with no choice but transit to a climate-neutral economy model,” said Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union. “Today’s new guidelines will help companies to disclose the impact of the climate change on their business as well as the impact of their activities on climate and therefore enable investors to make more informed investment decisions. I also welcome the three reports by the Technical Expert Group, which are an important contribution to European policy-making and global debate on green finance.”
The guidelines on corporate climate-related reporting suggest that companies should disclose the impact of climate change on their business model and vice-versa as well as the expected resilience of the company under different climate scenarios. The guidelines also highlight the value of the company disclosing its climate-related policies and due diligence processes, as well as disclosing the outcomes of these policies, particularly in terms of GHG emissions among other KPIs.
At the heart of the TEG’s taxonomy is the goal of finding a definition of which economic activities can be considered environmentally sustainable. To this effect, the report includes technical screening criteria for 67 activities that can make a substantial contribution to climate change mitigation across the sectors agriculture, forestry, manufacturing, energy, transportation, water and waste, ICT and buildings. The focus of the TEG’s taxonomy is on climate mitigation and adaptation and identifying activities that do no significant harm to the climate. Its recommendations identify the most relevant potential contributions to each environmental objective over the short and long-term.
The report on the EU Green Bond Standard recommends the use of the taxonomy to determine which climate and environmentally-friendly activities should be eligible for funding via an EU green bond. It also recommends the publication of a green bond framework, fund allocation reporting and third-party monitoring of the framework and projects progress.
The TEG’s guidelines on climate and ESG benchmarks disclosures aims to provide minimum technical requirements for market indices including technical advice on climate and ESG disclosures. European legislators have agreed to the creation of two types of climate benchmarks, the EU Climate Transition Benchmark (EU CTB) and the EU Paris-aligned Benchmark (EU PAB). According to the report, such benchmarks should fulfil four conditions:
- They must “demonstrate a significant decrease in overall GHG emissions intensity compared to their underlying investment universes or parent indices.”
- They “must be sufficiently exposed to sectors relevant to the fight against climate change”. This may be particularly relevant for impact investors as the report argues that “decarbonization cannot happen through a shift in the allocation from sectors with high potential impact on climate change and its mitigation (e.g. energy, transport, manufacturing) to sectors with inherently limited impact (e.g. health care, media).”
- Absolute performance is as important as performance relative to the index. “Climate benchmarks must demonstrate their ability to reduce their own GHG emissions intensity on a year-on-year basis”.
- The “green to brown share ratio” of where companies derive their revenues must be at least equal for EU CTBs and multiplied by at least 4 for EU PABs.
A range of steps will be taken to move the sustainable finance agenda forward. On June 24, the Commission will host a stakeholder dialogue on climate-related reporting and the TEG reports.
Calls for feedback in July will allow the TEG to refine its taxonomy, bond standards and benchmark guidelines, during the rest of the Group’s mandate, which has been extended to the end of 2019. The TEG will publish a final report on benchmarks in September 2019, which will serve as a basis to the drafting of delegated acts by the Commission. The delegated acts are expected to be adopted by early 2020.