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Green Financing: European Initiatives

Services: Finance and Capital Markets, ESG DATE: 28/08/2019

EU Directive and Guidelines.  On 18 June 2019 the European Commission published a series of guidelines and reports as part of its action plan on sustainable finance (the “Action Plan”), noting that the Commission has proposed a target of 25% of EU expenditure contributing to climate objectives between 2017-2021.

This indicates the increasing importance attached to Green Finance in Europe, but the applicable principles and guidelines, although comprehensive and detailed, are currently voluntary.

The most relevant EU Directive is 2014/95/EU (the “Directive”) regarding disclosure of non-financial and diversity information by certain large undertakings and groups, transposed into Irish law by the European Union (Disclosure of Non-Financial and Diversity Information by certain large undertakings and groups) Regulations 2017.

The Directive has been accompanied by the publication of various guidelines. A supplement on reporting climate-related information was published on 20 June 2019, providing guidelines for climate-related disclosures for each of the five reporting areas listed in the Directive, namely (a) business model, (b) policies and due diligence, (c) outcome of policies, (d) principal risks and risk management and (e) key performance indicators.

The Action Plan on Sustainable Finance

Following finalisation in 2015 of the Paris Climate Agreement (“PCA”) and the United Nation’s 2030 Agenda and Sustainable Development Goals (“2030 Agenda”), the European Commission developed the Action Plan on Sustainable Finance (the “Action Plan”), which addresses the climate change commitments and goals detailed in the PCA and the 2030 Agenda. To support this, the Commission appointed a High-Level Expert Group (“HLEG”) on sustainable finance which published a report on 31 January 2018. At the same time, the Technical Expert Group (“TEG”) on sustainable finance was formed to develop core principles for a codified sustainable finance market, and issued a series of key reports and recommendations on that basis.

The Action Plan contains a strategy that comprises the following key recommendations: (i) establish and maintain a sustainable taxonomy (classification system) at EU level and develop EU sustainability standards and labels; (ii) foster transparency and long-termism within economic activity; (iii) develop an EU green bond standard; and (iv) develop benchmarks for low-carbon investment strategies.

The EU Taxonomy

A taxonomy for environmentally-sustainable economic activities was released by the TEG on 18 June 2019 as one of the set of related documents published on that day. Although voluntary, the taxonomy is expected to be widely adopted. It provides clear criteria as to whether or not an activity will qualify as being environmentally sustainable, namely (i) that it must contribute substantially to one of the six EU environmental objectives (climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, waste prevention and recycling, pollution prevention and control, and protection of healthy ecosystems), (ii) cannot cause significant harm to any of the objectives, (iii) must meet minimum social safeguards and (iv) must comply with technical screening criteria.

EU Green Bond Standard

Another report published on 18 June 2019 took the 10 key recommendations of the TEG and combined them with the previously circulated Green Bond Principles (the “GBP”), thereby amalgamating the two trains of thought into a proposed, voluntary EU Green Bond Stand Standard (“EU-GBS”).

The GBP was built on four key tenets, namely (i) the description of the use of proceeds to finance assets and projects with positive environmental impacts, (ii) the requirement of a clear process for the selection of projects, (iii) a description of how the funds are allocated or tracked and (iv) reporting of the use of the proceeds and any information on the environmental impact of the projects. In addition, it was recommended that where possible an external review be implemented to provide increased oversight and transparency.

Under the EU-GBS these recommendations are developed further, particularly in the requirement that the “use of proceeds” information be included in legal documentation. EU-GBS also introduces four specific eligibility requirements in line with the proposed EU taxonomy, which include (i) substantial contribution to environmental objectives, (ii) do no significant harm, (iii) social safeguards and (iv) technical screening criteria, including metrics and related thresholds on sectors deemed environmentally sustainable. It also requires the disclosure of the proportion of proceeds used for refinancing, impact monitoring and reporting, the necessity for external review requirements, the publication of external verification and that external reviewers/verifiers must be accredited under a centralised scheme as operated by the European Securities and Markets Authority (ESMA).

For further information, please contact Peter O’Brien or your usual Matheson contact.