The package focuses on material sustainability reporting and disclosure obligations, as the EU looks to direct capital toward sustainable activities.
On 21 April 2021, one day prior to Earth Day and a US-led global climate summit, the European Commission adopted a much-anticipated package of measures as part of its policy to help direct capital towards sustainable initiatives and to help the European Union reduce its greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels and reach its 2050 carbon neutrality goal.
The package of measures include:
Corporate Sustainability Reporting Directive
In March 2021, the Sustainable Finance Disclosure Regulation (SFDR) came into force and imposed extensive environmental, social, and governance (ESG) disclosure requirements on in-scope EU institutional investors responsible for major capital flows. After much lobbying from financial institutions on the need for investee companies to elevate their ESG disclosures, the European Commission has concluded that the current level of information reported by companies under the NFRD does not meet the needs of investors and stakeholders and raises concerns about the ability of investors to meet their own disclosure requirements under the SFDR.
The CSRD introduces a number of changes, including the following material highlights:
Pursuant to the CSRD, companies would have to report on sustainability matters (including their plans to ensure that their business model and strategy are consistent with limiting global warming to 1.5oC), in accordance with the EU sustainability reporting standards.
EFRAG will set out the EU sustainability reporting standards in more detail. However, key points to note include:
The next step for the CSRD is for the European Parliament and the Member States in the Council to negotiate final legislative text. The European Commission anticipates that in parallel, EFRAG will work on a first set of draft EU sustainability reporting standards. According to the timetable provided by the European Commission, the earliest that companies would apply the standards would be in reports published in 2024, covering financial year 2023.
Multinationals should pay particular attention to the differing materiality thresholds for reporting within the CSRD, compared to other global standards such as the TCFD. Specifically, the CSRD would require a double materiality lens, obliging undertakings to report on both how sustainability matters affect the undertaking and the external impacts of the undertaking’s activities on people and the environment. This is a significant distinction from the single (financial) materiality lens of the TCFD, which aligns with a materiality threshold for other (financial impact) disclosures a company may make.
EU Taxonomy Climate Delegated Act
The EU Taxonomy Regulation captures all companies in scope of the NFRD (and will likely be extended to CSRD in-scope companies) in addition to other EU financial market participants, such as fund managers and financial advisors. The EU Taxonomy Climate Delegated Act (the DA), set to apply from 1 January 2022, aims to support sustainable investment by defining technical screening criteria for disclosures mandated under the EU Taxonomy Regulation. For more information on the EU Taxonomy Regulation, see this Latham blog post.
The technical screening criteria have been developed based on scientific work carried out by the EU’s Joint Research Centre, the EU Technical Expert Group, and experts on the Platform for Sustainable Finance.
The DA lists a number of economic activities in sectors covering 80% of EU carbon emissions (e.g., manufacturing, transport, energy, and buildings) and sets criteria to determine whether each activity can be considered to make a substantial contribution to climate change mitigation and adaptation, and to do no significant harm to environmental objectives.
While the College of Commissioners reached a political agreement on the text of the DA on 21 April 2021, it will be formally adopted only once it has been translated in all EU languages at the end of May.
The DA leaves out technologies such as gas and nuclear, which the European Commission will cover in a complementary Delegated Act of the EU Taxonomy Regulation alongside agriculture and certain manufacturing activities. This complementary Delegated Act will cover nuclear energy subject to the results of a review process underway based on the independent report published in March 2021 by the Joint Research Centre. Natural gas and related technologies are set to be covered as transitional activity if they fall within the limits of Article 10(2) of the EU Taxonomy Regulation.
By way of consequential amendments to a plethora of existing EU regulation triggered primarily by the standards in SFDR, six delegated acts propose the following changes, expected to apply from October 2022:
The European Commission hopes that these six delegated acts will empower retail investors to decide where and how their savings should be invested and increase the demand for financial instruments and products with sustainable investment strategies and those that consider adverse impact on sustainability.
The elements of this sustainability finance package are the latest policy efforts from the European Commission to give effect to the European Green Deal and to provide a comprehensive framework to assist companies in transforming their business models via enhancing the reliability and comparability of sustainability information.
In the run-up to COP26, countries are setting ambitious climate targets, and there is an increased appetite for sustainable finance products as well as a growing focus on the global convergence of standards. The European Commission is clearly hoping that its new sustainable finance package will establish the EU as a global standards leader.
This post was written with the assistance of Aleksandra Dulska in the London office of Latham & Watkins.
https://ec.europa.eu/finance/docs/level-2-measures/taxonomy-regulation-delegated-act-2021-2800_en.pdf https://ec.europa.eu/finance/docs/level-2-measures/taxonomy-regulation-delegated-act-2021-2800-annex-1_en.pdf https://ec.europa.eu/finance/docs/level-2-measures/taxonomy-regulation-delegated-act-2021-2800-annex-2_en.pdf
 EU Regulation 2020/852 dated 18 June 2020.
 Undertakings for the Collective Investment in Transferable Securities (UCITS) falling under the scope of Directive 2009/65/EC.
 Alternative Investment Fund Managers (AIFMs) falling under the scope of Directive 2011/61/EU.
 Markets in Financial Instruments Directive (MiFID) firms are investment firms falling into the scope of Directive 2014/65/EU of the European Parliament and of the Council (MiFID II).