The European Commission has presented a package of key enabling legislation on sustainable finance (the “Sustainable Finance Package”).  This includes the much-awaited first technical screening criteria under the Taxonomy Regulation — outlined in the Taxonomy Climate Delegated Act (“TCDA”) — and a proposal for a Corporate Sustainability Reporting Directive (“CSRD”), which significantly revises and expands on the existing Non-Financial Reporting Directive’s remit and disclosure rules for corporates. While the former is directly aimed at financial institutions and investors, and the latter at large and listed entities, the package has broader implications for all corporates.

Sustainable Finance Package: Context and Comment

The Commission’s intention with its Sustainable Finance Package is twofold: (1) in the short term, to set a clear regulatory framework to encourage investments that will contribute to a sustainable and inclusive economic recovery from the COVID-19 pandemic; and (2) in the long term, to ensure the transition to a carbon neutral EU economy by 2050, in accordance with the 2020 European Climate Law.  Following the adoption of the EU Taxonomy Regulation (explained further below), the Sustainable Finance Disclosure Regulation, and the Benchmark Regulation, which enhances the transparency of benchmark methodologies, the Commission has in this legislative package laid out the next building blocks for its envisioned sustainable finance ecosystem.

In addition to the impact on financial institutions and investors directly subject to the new laws, the Sustainable Finance Package may impact corporates in the following ways:

  • Corporates may be more likely to receive requests for data on their environmental and other sustainability practices as upstream capital markets participants grapple with new obligations to distinguish between green, “light green,” and other investments;
  • Corporates may be subject to direct requirements to report on activities relating to their environmental, social, and governance objectives;
  • Longer-term, the package may form the basis of a “blueprint” for wider stakeholders, meaning that corporates may need to improve performance against the standards, not just to attract capital, but also to remain competitive; and
  • On a global level, these EU sustainability measures have real potential to become gold standards and influence the investment market outside of the EU, a phenomenon known as the ‘Brussels Effect’.[1]

Corporates are therefore well-advised to assess both the scope of their reporting and disclosure obligations and those of their potential investors and other sources of capital, in order to remain competitive.

We will cover these developments in more detail in a series of articles. Below, we highlight the key issues that corporates should be aware of in: (1) the draft TCDA; and (2) the proposed CSRD.

  • Draft EU Taxonomy Climate Delegated Act

The Taxonomy Regulation introduced an EU-level taxonomy of environmentally sustainable activities, along with new disclosure requirements for financial market participants. Among other things, these include an obligation to disclose the proportion of turnover that is derived from, and the proportion of capital expenditure associated with, environmentally sustainable economic activities. The Taxonomy Regulation establishes high-level criteria and objectives to which economic activities must contribute to be deemed environmentally sustainable (or “green”), as well as harmful activities from which businesses must refrain. Its goal is to provide businesses, investors, consumers, and regulators with a common language about what is, and by extension what is not, an environmentally sustainable economic activity.

The Taxonomy Regulation also empowered the Commission to adopt Delegated Acts setting forth technical screening criteria. The draft TCDA (in its Annexes, here and here) sets forth sector-specific definitions of environmentally sustainable economic activities, ranging from manufacturing to electricity generation and transport. Notably, although the TCDA sets criteria for when hydrogen manufacture may be considered a sustainable investment (as we discussed in a recent article), it does not cover natural gas or nuclear energy, which are expected to be covered by supplementary technical screening criteria later this year.  The Commission will establish a web portal where stakeholders can make suggestions on other areas in mid-2021; these suggestions will be assessed by the Commission and Platform on Sustainable Finance.

Timeline

The Taxonomy Regulation entered into force on July 12, 2020, but the core transparency and disclosure provisions will only apply from January 1, 2022 with respect to climate change mitigation and adaptation objectives.  From January 1, 2023 the provisions will also apply in relation to the other environmental objectives contained in the Taxonomy Regulation.

The TCDA remains subject to scrutiny by the European Parliament and Council.  They will have three months to raise any objections they may have and could in theory block the adoption of the TCDA. The TCDA is otherwise expected to apply from the Fall of 2022.

  • Proposal for a Corporate Sustainability Reporting Directive

The proposed CSRD is intended to fill the informational gap between asset managers that must assess which economic activities are environmentally sustainable pursuant to the Sustainable Finance Disclosure Regulation and potential corporate investment targets that may not already make this information available.

The proposed CSRD is intended to extend the scope of the existing Non-Financial Reporting Directive, which only applies to large public interest entities[2] and groups with over 500 employees. By contrast, the CSRD will apply to all large[3] EU corporates and all listed companies, including listed SMEs.  In-scope entities would be required to report according to mandatory sustainability standards that include indicators that correspond to the Sustainable Finance Disclosure Regulation and Taxonomy Regulation.

The reporting would be subject to an “audit” or assurance requirement, which would move from an initial “limited” assurance requirement, to a “reasonable” requirement over time and as standards are agreed. The results would be included and published in companies’ management reports, and would also be made available to all via the envisaged European Single Access Point under the Capital Markets Union Action Plan.

Notably, the Commission’s CSRD proposal leaves the door open to an exemption for EU-based subsidiaries of parent companies based in third countries. However, the exemption will only be available if the Commission deems the third country’s sustainability reporting obligations equivalent to the EU obligations, pursuant to the Transparency Directive’s process for determining equivalence.  This will likely be an important area of future regulatory activity and will be an important area for multinational companies to watch.

Timeline

The CSRD proposal will follow the EU’s ordinary legislative procedure.  If the European Parliament and Member States can come to an agreement on standards — which is not a given — Member States will be required to implement the Directive by December 1, 2022.  Companies that are within the scope of the Directive would have to comply from financial years starting on or after 1 January 2023, meaning they would need to publish reports from 2024, whilst SMEs would have to comply from January 1, 2026.

If you have any questions concerning the material discussed in this blog, please contact the following members of our team:

 

John Ahern                          +44 20 7067 2190         jahern@cov.com

Sebastian Vos                      +32 2 549 5267              svos@cov.com

Thomas Reilly                     +44 20 7067 2000         treilly@cov.com

Sinéad Oryszczuk              +44 207 067 2141           soryszczuk@cov.com

Sarah Crowder                    +44 20 7067 2393         scrowder@cov.com

Paul Mertenskötter           +32 2 545 7517               pmertenskoetter@cov.com

 

 

[1] This term, coined by Anu Bradford of Columbia Law School, describes how the EU effectively sets global norms. Businesses adopt strict EU rules to legally operate on the European market, then adhere to them globally to minimize the cost of compliance. As EU rules come to be seen as the gold standard, other governments and international organizations replicate them, further strengthening this effect.

[2] Article 2 of the Accounting Directive (2013/34/EU), defines what is a public interest entity, namely: (a) listed/quoted/traded undertakings; (b) credit institutions; (c) insurance undertakings; or (d) those entities designated as a public interest entity by an EU Member State.

[3] Article 3(4) of the EU Accounting Directive provides that ‘large’ undertakings shall be undertakings which on their balance sheet dates exceed at least two of the three following criteria: (a) balance sheet total: EUR 20 000 000; (b) net turnover: EUR 40 000 000; (c) average number of employees during the financial year: 250.

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Marco Brand

Dr. Marco Brand is an associate in Covington’s Frankfurt office and a member of the corporate team. His practice focuses on financial regulatory law, in particular banking and asset management regulation, as well as on corporate matters and debt capital markets. Mr. Brand…

Dr. Marco Brand is an associate in Covington’s Frankfurt office and a member of the corporate team. His practice focuses on financial regulatory law, in particular banking and asset management regulation, as well as on corporate matters and debt capital markets. Mr. Brand has also experience in advising FinTech companies and payment service providers.

Photo of Paul Mertenskötter Paul Mertenskötter

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new…

Paul Mertenskötter is an associate in the firm’s Brussels office and a member of the Public Policy and International Trade practice groups. He advises multinational companies, governments, and other clients on a range of matters related to public policy, international trade, and new technologies. Mr. Mertenskötter’s practice encompasses advising clients on the European Commission’s Digital Single Market strategy, including on the Payment Services Directive (PSD 2).

Prior to joining the firm, Mr. Mertenskötter clerked at the International Court of Justice in The Hague, and was a Fellow at the Institute for International Law and Justice at NYU Law School. His work has been published with Oxford University Press and the Cornell Law Review.

Photo of Sinéad Oryszczuk Sinéad Oryszczuk

Sinéad Oryszczuk is special counsel and solicitor advocate in Covington’s London Life sciences and Environment regulatory team. Ms. Oryszczuk’s UK and EU law practice is diverse, spanning energy, environment, life sciences, consumer products, and technology sectors. She supports a variety of internal and…

Sinéad Oryszczuk is special counsel and solicitor advocate in Covington’s London Life sciences and Environment regulatory team. Ms. Oryszczuk’s UK and EU law practice is diverse, spanning energy, environment, life sciences, consumer products, and technology sectors. She supports a variety of internal and in-house teams including corporate, real estate, projects, construction, planning, health and safety, IP, insurance, and banking. She is experienced in contentious matters, assisting clients before criminal, civil, administrative and specialist tribunals, and non-contentious (regulatory, transactional/M&A) matters. She has advised in relation to some of the UK’s most high profile recent environment cases up to Court of Appeal level, as well as large group actions, and has brought cases before the European Court in life sciences matters. Prior to joining the firm, Ms. Oryszczuk spent 5 years in the UK’s leading specialist energy, environment, and regulatory team.

Ms. Oryszczuk has broad experience in traditional environment areas such as contaminated land and allocation of environment liabilities in transactions, permitting, waste, climate change, species-specific requirements, emissions, and contentious work including prosecutions relating to large scale pollution incidents, environmental damage, and general regulatory and subject specific ad-hoc advice. Ms. Oryszczuk also provides advice on specialist scientific and technical regulatory aspects spanning a variety of sectors. She has built up particular expertise in chemicals law and hazardous/regulated substances (e.g. REACH, CLP, RoHS, biocides, nuclear/radiological), novel technologies and agri-tech (e.g. advanced genetic engineering, GMOs, nano), and corporate/accounting and regulatory energy and environment reporting and efficiency (e.g. EU ETS, CRC, mandatory energy audits (ESOS) and non-financial reporting).

Ms. Oryszczuk advises day-to-day on transactional matters and liability (including director/officer and parent company), land contamination and hazardous substances, and in multinational competitive bids. She has a broad experience including in relation to manufacturing and waste facilities, energy storage projects, wind farms, grid projects, redevelopments and remediation projects, landfills, mines and minerals operations, and nuclear and radioactive materials facilities. She has acted for a variety of parties including buyers/sellers, tenants/landlords, bidders, lenders, insurers, developers, authorities/regulators, trustees, insolvency practitioners, and private equity/funders. Ms. Oryszczuk provides specialist corporate due diligence (including vendor due diligence). She often acts as specialist outside counsel and has drafted bespoke instruments including transfer of liability deeds, contractor T&Cs, site remediation/investigation/access agreements, as well as environment indemnities and warranties. Ms. Oryszczuk often coordinates multinational projects and advice and regularly liaises and negotiates with regulators on behalf of her clients. On corporate work in particular, Ms. Oryszczuk assists very large multinationals (including global asset funds) with complex organisational structures through national and international compliance scenarios, including on corporate reporting and carbon .trading.

On contentious work, Ms. Oryszczuk has taken leading roles in some of the UK’s largest and most high profile environment cases, often building on her science background in respect of issues concerning hazardous substances. She regularly defends in relation to large domestic civil group actions relating to environment issues. More recently she has acted in contentious life sciences cases relating to medicinal products including before the European Court and national regulators, e.g. the UK’s NICE.