Major Steps Forward for EU Sustainable Finance

The rise of environmental, social, and governance ("ESG") principles is gaining momentum in the EU, with the availability of sustainability measurement benchmarking tools relying on more transparent and qualitative ESG data, agreement on a common classification system, or taxonomy, for sustainable activities, and a push by the EBA to support the greening of the financial system at the banks' level.

Climate-Related Benchmarks Regulation

Regulation (EU) 2019/2089 of the European Parliament and of the European Council on climate-related benchmarks was published on December 9, 2019 ("Climate-Related Benchmarks Regulation"). The Climate-Related Benchmarks Regulation amends Regulation (EU) 2016/1011 ("Benchmark Regulation"), introducing two new types of benchmarks—EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks ("Climate-Related Benchmarks")—and establishing certain transparency requirements regarding sustainability-related disclosures.

The underlying assets for these new benchmarks will have to: (i) be selected, weighted, or excluded in such a manner that the resulting benchmark portfolio is either on a decarbonization trajectory, or its carbon emissions are aligned with the objectives of the Paris Agreement; (ii) be constructed in accordance with certain minimum standards to be determined in level 2 texts; and (iii) ensure the activities of the underlying assets cannot cause significant harm to other ESG objectives.

Benchmark administrators providing the Climate-Related Benchmarks must comply with the Climate-Related Benchmarks Regulation by April 30, 2020, and must endeavor to provide one or more EU Climate Transition Benchmarks by January 1, 2022. As part of the Climate-Related Benchmarks Regulation, the time limit for mandatory administration of and contributions to critical benchmarks was extended to five years (see Recital 25 and Article 19d).

In order to enhance transparency and enrich disclosure relating to the benchmarks, benchmark administrators will have to include in their required benchmark statement pursuant to Article 27(2) of the Benchmark Regulation:

• as from April 30, 2020, an explanation of how ESG factors are reflected in each benchmark or family of benchmarks provided and published. For those benchmarks or families of benchmarks that do not pursue ESG objectives, administrators should clearly state in the benchmark statement that they do not pursue such objectives;
• as from April 30, 2020, both for significant equity and bond benchmarks and for the Climate-Related Benchmarks, details on whether or not, and to what extent, a degree of overall alignment with the target of reducing carbon emissions or the attainment of the objectives of the Paris Agreement is ensured; and
• as from December 31, 2021, for each benchmark—or, where applicable, each family of benchmarks, with the exception of interest rate and foreign exchange benchmarks—an explanation of how their methodology aligns with the target of carbon emission reductions or attains the objectives of the Paris Agreement.

Political Agreement on the EU Taxonomy: Halting Progress

The EU taxonomy, the harmonized EU classification system for sustainable activities, is the cornerstone of the EU Action Plan. A year and a half after the European Commission first proposed the EU taxonomy, European colegislators reached a final compromise on December 5, 2019, on the economic activities that can be considered compliant with the EU taxonomy. A more inclusive approach was adopted, with certain transitioning activities being included in addition to activities more traditionally considered "green." On December 12, 2019, the European Council rejected the compromise on the EU taxonomy mostly because of a disagreement by some EU Member States on nuclear energy. Discussions continued, and European legislators overcame divisions on nuclear energy, with the recognition of nuclear and gas as "transition" activities, leading to a political agreement between the European Parliament and the European Council on December 18, 2019.

EBA Push for Early Action on Sustainable Finance

In the first salvo by the EBA, the EBA published its workplan on sustainable finance on December 6, 2019. The workplan focuses first on key metrics and disclosure to support banks' green strategies and then looks into evidence for any adjustments to risk weighting. The workplan aims to improve the regulatory framework, including EBA regulation, the Capital Requirements Regulation and Capital Requirements Directive, the new Investment Firms Regulation and Investment Firms Directive, and the related legislative initiatives stemming from the EU Action Plan. We discuss these points in more depth in a separate Jones Day publication entitled "European Banking Authority Issues Action Plan on Sustainable Finance."