Sustainable Finance Disclosure Regulation (SFRD) – Q&A published by the EU Commision

The following points were addressed:

1. The 500-employee criterion includes employees of a parent undertaking and of subsidiary undertakings regardless of whether they are established inside or outside the EU.

2. The definition of ‘financial market participant’ outlined in the regulation includes both EU Alternative Investment Fund Managers (AIFMs) and non-EU AIFMs.

3. Registered AIFMs must also fulfil the requirements laid down in the SFDR.

4. In addition to ‘sustainable investments’, Article 9 products may also include investments for specific purposes such as hedging or liquidity, which must meet minimum environmental or social safeguards.

5. A financial product that promotes environmental, social or sustainability requirements or restrictions laid down in law, including international conventions or voluntary codes, in its investment policy is subject to Article 8. Additionally, financial products having an environmental objective but not meeting the DNSH principle should also qualify as Article 8 products.

Furthermore, the promotion of ESG characteristics does not refer solely to pre-contractual disclosures, but also to a broad range of documents including marketing communications, advertisements, use of product names or designations, and factsheets.

This Q&A was published in response to questions asked by the European ESAs (ESMA, EIOPIA and EBA). It provides clarity for financial market participants in response to a broad range of questions relating to the disclosure requirements specified in the Sustainable Finance Disclosure Regulation 2019/2088.

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Spain’ Sovereign Green Bond Issuance in September

The Spanish Sovereign Green Bond Framework is aligned with the four core components of the Green Bond Principles 2021 (GBP) and follows best market practices identified by Vigeo Eiris (VE). The Kingdom of Spain’s Sovereign Sustainability Rating from VE is 78/100, which indicates an ‘advanced’ sustainability performance, the highest level on VE’s four-point scale.

Spain will sell its inaugural green bond in September. The Spanish Treasury’s first such bond will have a 20-year maturity. Spanish government did not specify how much it plans to raise, though the government has identified 13.6 billion euros ($16.1 billion) of projects to finance or refinance projects tied to the country’s environmental objectives, including renewable energy, biodiversity protection, and climate change adaptation.

In addition, Spain will invest around 20 billion euros on other environmental programs through 2023 that will be financed by the European Union’s executive arm. The bloc is also expected to make its green bond debut later this year and ultimately become the world’s biggest seller, channelling those funds to member states as part of its pandemic recovery package.

The EU has also laid out a voluntary green bond framework and Spain plans to align its spending with the bloc’s classification of sustainable investments, or taxonomy. The first green bond is included in the country’s plan to issue 80 billion euros of net debt this year.

Spain’s Sovereign Green Bond Framework: https://bit.ly/3zNr22V

Vigeo Eiris’ Second Party Opinion: https://bit.ly/3rGEP8v

The EU Fit for 55 Package

It is intended to fundamentally revise the EU’s energy policy framework and thus adapt it to the EU updated climate targets. By 2030, the EU’s GHE are to be reduced by 55% compared to the amount emitted in 1990. While the focus in December 2021 will be on decarbonised gas and the buildings sector, ten initiatives was planned last 14 July 2021. Overall, the “Fit for 55 Package” with the initiatives listed below is the central measures package of the European Green Deal:

1.- Revision of the EU Emissions Trading System (ETS), including maritime transport, aviation and CORSIA

2.- Carbon Border Adjustment Mechanism (CBAM)

3.- Revision of the Effort Sharing Regulation (ESR)

4.- Revision of the Energy Tax Directive (ETD)

5.- Amendments to the Renewable Energy Directive (RED) to implement the ambition of the new 2030 climate target

6.- Amendments to the Energy Efficiency Directive (EED) to implement the ambition of the new 2030 climate target

7.- Reduction of methane emissions in the energy sector

8.- Revision of the regulation on the inclusion of greenhouse gas emissions and removals from land use, land use change and forestry (LULUCF)

9.- Revision of the Directive on the Deployment of Alternative Fuels Infrastructure

10.- Revision of the Regulation setting CO2 standards for new passenger cars and for new light commercial vehicles

11.- Revision of the Third Energy Package for gas (Directive 2009/73/EU and Regulation 715/2009/EU) to regulate competitive decarbonised gas markets in Q4 2021

12.- Revision of the energy performance of Buildings Directive (EPBD) in Q4 2021

Vice-President Franz Timmermans presented the plans in Brussels last Wednesday. That was the kick-off for a long process, looking for agreement among the Commission, the Parliament, and the Member States. This will be a challenge, as the new seems to be on achieving the reduction targets, which open to the countries’ challenges of what adjustments are necessary to achieve them. Another key aspect is how to support industries and companies that compete with others abroad EU, maintain international competitiveness. Specially with competitors in countries where the financial burden of environmental protection is lower. Nowadays, these are only draft initiatives, we do not know yet when the implementation will begin in the individual Member States, and what specific content will have agreed on at that time.

This stablishes the EU positioning of climate policy in everyday Europeans’ life, impacting firms and the way Europe makes business. It is key to ensure no one must be left behind in the process, to guarantee a social and society fair transition.

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Commission puts forward New strategy for Sustainable Finance and proposes new European Green Bond Standard

The Commission also adopted yesteday a Delegated Act on the information to be disclosed by financial and non-financial companies about how sustainable their activities are, based on Article 8 of the EU Taxonomy.

Thus, EU took another major step towards achieving the goals in the Green Deal by ensuring a comprehensive approach to funding the green transition.

EU proposed incorporating climate-related risks into banks’ capital requirements. The challenge for lenders is weaning themselves off their lending exposure to fossil fuels. Their initial disclosures have been limited and commercial lenders still have “patchy” data regarding their exposure to climate change.

The ECB will hold a stress test next year to see how their balance sheets may fare as the climate and economy shifts. EU states will be asked to assess by June 2023 how their financial markets contribute to reaching the bloc’s climate goals. ECB will then calibrate the right pace for the transition by setting intermediate targets for the financial sector. Insurance capital rules may also be similarly amended.

The Commission confirmed it will publish taxonomy rules later this year for agriculture, certain industries and possibly nuclear and gas power plants. EU needed to guard against the risks associated with the transition, thus considering an “intermediate taxonomy” that would allow transition bonds.

The strategy seeks to empower individuals and the bloc’s 23 million SME by defining green loans and mortgages by 2022. New accounting rules may also be needed to “recognise and report” ESG risks in financial statements.

The strategy sets out a positive vision of the reform needed in the financial system to support the European economy.

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New EU measures for transitioning to a Sustainable Economy

The EU Strategy for Financing the Transition to a Sustainable Economy, and the rulebook for green bonds will be unveiled next week. They center around the Green Deal to reach net-zero emissions by 2050.

The EU strategy will propose tightening reporting requirements for financial entities, by incorporating climate-related risks into credit ratings and bank capital requirements. It will also enable supervisors to address greenwashing.

The European Commission (EC) will invite the ESMA to assess how ESG factors are incorporated by credit rating agencies and will consider proposing an initiative to make sure those risks are captured by the assessments. The EC will also ask the ECB to conduct regular climate change stress tests.

The strategy paves the way for financing activities such as natural gas during the transition, after Germany and Poland pushed for including it in the taxonomy, despite the resistance of the others member states. Thus, BAU is falling under the agenda of sustainable finance.

Supervision of ESG risks for credit institutions and investment firms

The European Banking Authority (EBA) published yesterday a report which provides recommendations for institutions to incorporate ESG risks-related considerations in strategies and objectives, governance structures, and to manage these risks as drivers of financial risks in their risk appetite and internal capital allocation process. The EBA also recommends developing methodologies and approaches to test the long-term resilience of institutions against ESG factors and risks including the use of scenario analysis.

EBA sees a need applying at least a 10 years horizon to capture ESG related risks, proposing a phase-in approach. This Report should be considered in conjunction with the EBA and ESAs disclosure publications under the Capital Requirements Regulation (CRR), the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR). The EBA will publish Pillar 3 disclosure requirements on ESG risks, transition risks and physical risks, as defined in this Report, later this year.

The report will be taken into consideration in the context of the Renewed Sustainable Finance Strategy, the review of CRR/CRD, and an update of the SREP Guidelines to include ESG risks in the supervision of credit institutions.

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Countries’ map developing National Action Plans (NAPs) on Business and Human Rights

NAPs are policy documents in which a government articulates priorities and actions that it will adopt to support the implementation of international, regional, or national obligations and commitments with regard to a given policy area or topic.

The UN Working Group on human rights and transnational corporations and other business enterprises (UN Working Group), mandated by the Human Rights Council to promote the effective and comprehensive implementation of the UN Guiding Principles on Business and Human Rights (UNGPs), noted in its 2016 Guidance on business and human rights NAPs that they can be an important means to promote the implementation of the UNGPs.

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The ESG Green Bond Principles (GBP) 2021 edition has been updated by the International Capital Market Association @ICMA

The GBP seek to support issuers in financing environmentally sound & sustainable projects that foster a net-zero emissions economy & protect the environment. An estimated 97% of sustainable bonds issued globally in 2020 referenced the Principles.

The four core components that an issuer should disclose to align with the GBP remain unchanged (use of procedes, evaluation & selection, management of procedes, & reporting). The GBP identifies recommendations regarding green bond frameworks and external reviews for heightened transparency. It recommends heightened transparency for issuer-level sustainability strategies & commitments. It recognises that ongoing developments of taxonomies may require parties to consider such taxonomies when determining the environmental sustainability of projects.

The 2021 editions of the the Social Bond Principles (SBP) & the Sustainability Bond Guidelines (SBG) have been similarly revised. The 2021 edition of the Guidance Handbook has also been updated & reflects such revisions.

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The EU Green Bond Standard (EU GBS

It will be logically voluntary. It will be ready to be used in 2022 and aims to set the global standard. Global ESG debt market tops 3 TUSD, with Europe taking a lead as nearly a quarter of its bond sales this year were related to social factors.

Sovereign issuers will be granted some flexibility to assess government spending programs based on their terms and conditions. The 27-member bloc itself is set to become one of the largest issuers, with 30% of its 800 BEUR pandemic recovery funding planned as green debt.

The ESMA will determine whether a bond is green or not, with external reviewers to be approved by the body. Issuers should disclose impact assessments at least once, as well as annual allocation reports for how the funds were used and they will be free to align their bonds alongside other standards.

EU GBS affords issuers an opportunity to launch taxonomy-aligned green bonds at a potentially lower cost of capital. For investors, the standard affords an opportunity to make investments in green bonds that are credible and easier to report on.

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Call for an EU Biodiversity Law

A new resolution to improve biodiversity in Europe was proposed by the European Parliament’s Committee on Environment, which includes binding environmental targets for 2030 and 2050. This includes: 30% of EU’s land and sea must be protected áreas; binding targets for urban biodiversity such as green roofs on new buildings; urgent action needed to stop population decline of bees and other pollinators.

MEPs regretted that the EU didn’t achieve its biodiversity targets for 2020 and stated that the new strategy must adequately address the five main drivers of transformation in nature: changes in land and sea use, direct exploitation of organisms, climate change, pollution, and invasive alien species. They are also asking for 20 KMEUR/y for action on biodiversity in Europe.

In addition, they demand the next United Nations conference in October 2021 creates a Paris Agreement that sets global biodiversity priorities for 2030 and beyond.

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