BANKS: CLASSIFICATION OF EXPOSURES TO ESG RISKS

The EBA is carrying out a number of surveys and consultations in anticipation of some of the approximately 140 mandates that it will have under the upcoming EU Banking Package (CRR 3 and CRD 6, each of which has been provisionally politically agreed). In light of an expected 31 December 2024 deadline, the EBA launched a survey to collect qualitative input from credit institutions on their current and planned practices for identifying and qualifying exposures to ESG risks, including information on the availability and accessibility to the relevant data. The survey focuses on the (banking book) credit exposures of EU/EEA institutions. Exposure classes cover non-financial corporates, retail and non-retail small SMEs and households. The survey closes on 29 March 2024. Responses will feed into a related mandate for the EBA and EIOPA to look at introducing a standardised methodology for identifying and quantifying those exposures.

CORPORATE SUSTAINABILITY DUE DILIGENCE DIRECTIVE (CSDDD): DELAYED

On 28 February 2024, the EU Council's COREPER again failed to reach the qualified majority necessary to endorse the December 2023 provisional political agreement on the proposed CSDDD.

Unless agreement can be reached in early March 2024, it is increasingly likely that the CSDDD may need to be considered again by the co-legislators in trilogues following the European elections this summer.

ENFORCEMENT OF SUSTAINABILITY INFORMATION: DRAFT GUIDELINES

ESMA's consultation paper on draft guidelines on enforcement of sustainability information closes for comments on 15 March 2024.

The Corporate Sustainability Reporting Directive (CSRD) broadens the scope of undertakings who must report sustainability information and requires the European Commission to adopt mandatory European Sustainability Reporting Standards (ESRS). The sector-agnostic ESRS (Commission Delegated Regulation (EU) 2023/2772) were published in the Official Journal on 22 December 2023. The deadline for the Commission to adopt the second set of ESRS, which will cover sector-specific standards, proportionate standards for listed SMEs and standards for non-EU companies, has been pushed out by two years to June 2026.

CSRD introduces a new Article 28d to the Transparency Directive which requires ESMA to issue guidelines on the supervision of sustainability reporting by national competent authorities (NCAs). The main goals of the draft ESMA guidelines are to ensure that NCAs carry out their supervision of listed companies' sustainability information under the CSRD, the ESRS and Article 8 of the EU Taxonomy Regulation in a converged manner. ESMA also wants to ensure that there is consistency in, and equally robust approaches to, the supervision of listed companies' sustainability and financial information.

ESMA is suggesting that the guidelines apply to all NCAs undertaking supervision of sustainability information under the Transparency Directive. That sustainability information should be in respect of issuers (EU and third country) with securities admitted to trading on a regulated market who are required to publish sustainability information under the Accounting Directive. In-scope enforcement would cover the sustainability information required by the Accounting Directive and the ESRS, and the sustainability information required by Article 8 of the Taxonomy Regulation and the Disclosures Delegated Act.

EU TAXONOMY-ALIGNING BENCHMARKS: TWO NEW BENCHMARKS PROPOSED

The EU Platform on Sustainable Finance published a draft report and a call for feedback in December 2023 on proposals to introduce two EU Taxonomy-aligning benchmarks without and with exclusions (known as EU TAB and EU TABex). The call for feedback will close on 13 March 2024.

The draft report sets out the definition of a Taxonomy-aligning benchmark as an "...investment benchmark that incorporates – next to financial investment objectives – specific objectives related to greening of CapEx, greenhouse gas (GHG) emission reductions...and the transition to a low-carbon economy through the selection and weighting of underlying constituents". Use cases include an underlying for passive investment strategies; an investment performance benchmark for GHG emission-related strategies which aim to scale environmentally sustainable CapEx and can tolerate a substantially slower decarbonisation than EU Paris-aligned benchmarks; an engagement tool; or a policy benchmark to help guide strategic asset allocation.

The two proposed Taxonomy-aligning benchmarks differ in terms of both aims and conditions. EU TABexs (Taxonomy-aligning benchmarks with exclusions) are designed for more ambitious climate-related investment strategies and are characterised by stricter activity exclusion requirements. EU TABs (Taxonomy-aligning benchmarks without exclusions) allow for greater diversification and serve the needs of institutional investors with reciprocal business relationship to fossil fuel issuers.

INSURANCE: SUSTAINABILITY CLAIMS AND GREENWASHING

EIOPA's consultation paper on its draft opinion on sustainability claims and greenwashing closes for comments on 12 March 2024. EIOPA's draft opinion sets out four principles to be observed when providers make sustainability claims (accompanied by examples of good and bad practice for each principle):

  • Principle 1: Sustainability claims made by a provider should be accurate, precise, and consistent with the provider's overall profile and business model, or the profile of its product(s).
  • Principle 2: Sustainability claims should be kept up to date, and any changes should be disclosed in a timely manner and with a clear rationale.
  • Principle 3: Sustainability claims should be substantiated with clear reasoning and facts.
  • Principle 4: Sustainability claims and their substantiation should be accessible by the targeted stakeholders.

INSURANCE: SUSTAINABILITY RISKS: PRUDENTIAL TREATMENT UNDER SOLVENCY II

EIOPA's consultation paper on the prudential treatment of sustainability risks under the Solvency II Directive closes for feedback on 22 March 2024. The consultation paper resulted from the mandate to EIOPA in the upcoming directive that will amend Solvency II (provisionally agreed in trilogue) to look at whether a dedicated prudential treatment of exposures related to assets or activities associated substantially with environmental or social objectives would be justified. As part of that, EIOPA must assess the potential effects of a dedicated prudential treatment of exposures related to assets and activities which are associated substantially with environmental and/or social objectives or which are associated substantially with harm to such objectives on the protection of policy holders and financial stability in the EU, including fossil fuel-related assets.

SUSTAINABILITY-LINKED LOANS: LMA GUIDE AWAITED

The Loan Market Association has signposted that we can expect to see a new guide on application of the sustainability-linked loan (SLL) principles to fund financing in Q1 2024, together with mandate letters for sustainability coordinators in the SLL market.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.