Stockholm (NordSIP) – On 13 June, the European Commission presented a new package of measures seeking to strengthen the union’s sustainable finance framework by further expanding the EU Taxonomy and introducing rules on the operations of ESG rating agencies. “We have the foundations of the sustainable finance framework in place,” commented Mairead McGuinness, Commissioner for Financial Services, Financial Stability and Capital Markets Union, upon unveiling the green package. “Now it is time to build on them.”
Taxo 4, and more
Following a public consultation, the Commission has now approved in principle a new set of criteria for economic activities making a substantial contribution to one or more of the non-climate environmental objectives, aka Taxo 4. Whereas the EU Taxonomy previously only covered the two objectives of climate mitigation and adaptation, the new version includes the remaining non-climate environmental objectives: sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and conservation and restoration of biodiversity and ecosystems.
Apart from that, the Commission has made some amendments to the EU Taxonomy Climate Delegated Act regarding climate change mitigation and adaptation, particularly in the manufacturing and transport sectors.
The experts are yet to dissect the details of the legislation. Still, at first glance, it appears that this time around, the Commission has followed closely the recommendations of the Platform on Sustainable Finance (PSF) published last year.
“Enhancing the usability and coherence of the sustainable finance framework will be our key priority,” states Commissioner McGuinness, reiterating the new mantra of the PSF.
ESG rating providers under scrutiny
The Commission has been paying attention also to the calls for regulating the ESG ratings sector. These have been prompted by the fact that the current state of the ESG ratings market leaves some room for improvement. Meanwhile, investors increasingly integrate the data provided by these institutions into their investment processes.
According to the new proposal, ESG rating providers offering services to investors and companies in the EU will have to be authorised and supervised by the European Securities and Markets Authority (ESMA). Regulating the sector is expected to improve the reliability and transparency of ESG ratings, prevent potential conflicts of interest and generally increase the integrity of the operations of rating providers.
“This proposal does not intend to harmonise the methodologies used for the creation of ESG ratings, but to increase their transparency,” notes the EC in the Q&A accompanying the announcement of the new sustainability package. “ESG rating providers will remain in full control of the methodologies they use and will continue to be independent in their choice to ensure that a variety of approaches are available in the ESG ratings market.” The statement is a clear indication that the upcoming regulation’s primary purpose is to increase transparency rather than standardisation.
The Commission will now engage in discussions with the European Parliament and Council regarding the ESG ratings proposal.
“The EU has achieved a great deal to promote sustainable finance over the years,” commented Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, upon unveiling the new green package. “Today, we are going even further in completing the regulatory landscape to help generate much-needed investments for sustainable growth.”