The European Union's ("EU") plan to incentivize sustainable development and combat "greenwashing"—the omission or inaccurate disclosure of climate-related information—has taken shape since the Action Plan on Financing Sustainable Growth was published in March 2018.

European "Taxonomy"

Underpinning the EU Action Plan is the draft Taxonomy Regulation, a proposed far-reaching law meant to create a classification system, or "taxonomy," of environmentally sustainable economic activities throughout the EU.

The draft Taxonomy Regulation, among other things, would create a framework for screening sustainable investments and require that any activity labeled "sustainable":

  • Substantially contribute to one of the Taxonomy Regulation's six environmental objectives (e.g., climate change mitigation and adaptation, marine conservation, pollution prevention);
  • Pass a "do-no-significant-harm" to the other five environmental objectives;
  • Comply with minimum social and governance safeguards; and
  • Comply with specific technical screening criteria to be established by the European Commission (the EU executive branch).

In September 2019, the EU member states' ambassadors greenlit a proposal for the European Commission to negotiate an agreed Taxonomy Regulation text with the European Parliament "when practicable," suggesting a further delay of a final text's entry into force.

Corporate Disclosure

While seeking to implement a common framework in the Taxonomy Regulation, the EU has identified a lack of uniform corporate disclosure of climate-related information as a main obstacle to sustainable investment. In June 2019, the European Commission issued guidelines on reporting climate-related information as a supplement to its 2017 guidelines on nonfinancial reporting.

Large public interest entities with more than 500 employees (including listed companies, banks, and insurance companies) are encouraged to provide reliable information to investors and the public to compare the impacts of: (i) the company's activities on climate change; and (ii) climate change on a company's development, performance, and position (a so-called "double materiality" standard).

These supplementary guidelines further recommend that reporting companies disclose information relating to their business model, due diligence processes, principal risks and risk management, and outcomes of the company's climate policy. They also simplify previously proposed guidelines by removing the distinction between information that "should" be and is "recommended" to be disclosed.

EU Green Bond Standard

Another key development is the European Commission's June 2019 publication of a long-awaited report introducing the EU Green Bond Standard ("EU-GBS"). The EU-GBS is meant to be a voluntary standard that adopts market-leading practices while applying the Taxonomy Regulation to European green bond issuances, such as the "do-no-significant-harm" analysis and sustainable project screening. The EU-GBS notably introduces the requirement of an auditor accredited by the European Securities and Markets Authority to verify that an EU-GBS product's use of proceeds are allocated to finance new and/or refinance existing green projects.

The European Commission's Technical Expert Group, which, among others, drafted the EU Taxonomy report and the EU-GBS report and has been central to building EU sustainable finance policy, is currently set to be dissolved at the end of 2019 and replaced by a yet-undefined EU Platform on Sustainable Finance.

While some European market participants look with trepidation at upheaval associated with climate-related risks, the EU has shown leadership in significantly, albeit slowly, adapting its laws and policy to address such risks. Companies and investors should observe closely.

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