Sustainable Finance Update

• MEPs call for human rights and environmental due diligence
• European Supervisory Authorities deliver on draft regulatory technical standards on sustainability-related disclosures
• IFRS Foundation Trustees announce next steps for sustainability standards

MEPs call for human rights and environmental due diligence

The European Parliament (EP) Legal Affairs Committee approved (21 votes in favour, 1 against and 1 abstention) the draft legislative initiative report on human rights and environmental due diligence in the corporate supply chain drawn up by Lara Wolters (S&D, Netherlands) on 27 January.

The report indicates that the future European Commission’s (EC) Directive will have to require companies to monitor, identify, prevent, and remedy risks to human rights, the environment and governance in their operations and business relationships — including suppliers and sub-contractors. The scope of the future legislation should encompass large companies (including financial institutions), listed SMEs and high-risk SMEs.

The final vote is expected at the March plenary. The EC will present its proposal by June.

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Summary of the stakeholder views on the upcoming renewed sustainable finance strategy

The EC’s summary report indicates that one of the challenges to mainstreaming sustainability in finance is the availability, comparability and quality of data on environment, social and governance. The EC is expected to publish its renewed sustainable finance strategy in the first half of 2021.

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European Supervisory Authorities (ESAs) publish draft regulatory technical standards (RTS) on sustainability-related disclosures

The Joint Committee of the three ESAs (EBA, EIOPA and ESMA) delivered to the EC their final report, including the draft RTS, on the content, methodologies and presentation of disclosures under the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR). The proposed RTS aim to strengthen protection for end-investors by improving environmental, social and governance (ESG) disclosures on the adverse impacts of investment decisions and on the sustainability features of a wide range of financial products. The EC is expected to endorse the RTS within three months.

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Exchange of Views with the President of the Council (ECOFIN)

The EP Economic Affairs Committee held an exchange of views with Mr. Joao Leão, ECOFIN President and Portuguese Minister for Finance on 1 February. He presented the three main priorities for the Portuguese presidency on economic issues:

• relaunch the economy through the Recovery and Resiliency Fund and sustainable fiscal policies in the medium term
• strengthen the European Monetary Union and reduce the fragmentation in financial regulation
• address the challenges of green and digital transition, with a special focus on a renewed sustainable finance strategy

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The EC adopts ‘do no significant harm’ technical guidance to protect the environment

The guidance was presented in the context of the Recovery and Resilience Facility (RRF). It aims to support Member States in ensuring that all investments and reforms to be financed by the RRF ‘do no significant harm’ to the EU’s environmental objectives, within the meaning set out in the Taxonomy Regulation. It outlines key principles and a two-step methodology for the assessment of ‘do no significant harm’ in the context of the RRF to facilitate the work of Member States in the preparation of their plans.

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European Central Bank sets up climate change centre

The European Central Bank (ECB) has decided to set up a climate change centre to bring together the work on climate issues in different parts of the institution. This initiative demonstrates the growing relevance of this issue for the economy and the ECB’s policy, and the need for a more structured approach to strategic planning and coordination. The work areas of the centre will focus on: financial stability and prudential policy; macroeconomic analysis and monetary policy; financial market operations and risk; EU policy and financial regulation; and corporate sustainability.

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UK joins the International Platform on sustainable finance

The EC welcomed the UK to the International Platform on Sustainable Finance (IPSF). The UK’s membership of IPSF will support the global commitment to greening financial systems, and mobilising finance for clean and resilient growth, and the aims of COP26.

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CFA Institute calls on policy makers to improve corporate governance in EU

CFA Institute, the international association of investment professionals, issued recommendations on corporate governance and ESG disclosures. CFA is calling, among others, for legislative consistency in light of the upcoming revision of the Non-Financial Reporting Directive to enhance clarity and avoid misinterpretations from organisations and investors.

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IFRS Foundation Trustees announce next steps for sustainability standards

The IFRS Foundation will set up a Trustee Steering Committee to oversee next steps on sustainability reporting. They expect to produce a final proposal (including a roadmap and timeline) by the end of September 2021, with the intention of announcing the establishment of the Sustainability Board in COP26 in November 2021.

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The Global Risks Report 2021

The World Economic Forum published their annual Global Risks Report for 2021. Environmental risks are amongst the top five global risks both in terms of likelihood and impact.

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Blackrock’s Larry Fink CEO letter 2021

Blackrock’s Larry Fink issued his annual letter to CEOs for 2021 calling on companies to:

• disclose a plan for how their business model will be compatible with a net zero economy, including how such plans are incorporated into long-term strategy and reviewed by the board, and
• expand disclosures on talent strategy to fully reflect long-term plans to improve diversity, equity, and inclusion.

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The three asks by Climate Action 100+

Investors participating in Climate Action 100+ ask for three commitments from boards and senior management to address decarbonisation of the economy:

• implement a strong governance framework which clearly articulates the board’s accountability and oversight
• take action to reduce greenhouse gas emissions across the value chain, consistent with the Paris Agreement’s ambitions
• provide enhanced corporate disclosure in line with the Task Force on Climate-related Financial Discolsures (TCFD)

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VBA publishes a first paper on the Impact Statement Methodology

The Value Balancing Alliance (VBA) issued methodology for general, cross-cutting aspects. Their goal is to create a single standardised method to ensure greater sustainability, transparency and comparability in business. Detailed papers on environmental and social economic impact valuation will be published soon.

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A Sustainable Finance Strategy for Luxembourg and its financial centre

The Luxembourg Sustainable Finance Initiative (LSFI) launched the Luxembourg Sustainable Finance Strategy. It will define concrete actions in the financial sector’s transition  towards sustainability. LSFI is a public-private partnership aimed to raise awareness, promote and develop Luxembourg’s role as a sustainable finance hub.

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ASCG delivers ESG study to the German Federal Ministry of Justice and Consumer Protection

The Accounting Standards Committee of Germany (“ASCG”/DRSC) has successfully completed its work on the ESG study commissioned by the German Federal Ministry of Justice and Consumer Protection. The report includes the state of play of non-financial reporting in Germany and some recommendations.

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