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The EU Sustainable Investment Regulation
AUTHOR(S): Peter O’Brien, Nicola Dunleavy
KEY CONTACT(S): Peter O’Brien, Nicola Dunleavy, Maria Kennedy, Garret Farrelly
PRACTICE AREA GROUP: Finance and Capital Markets, Banking Advisory, Commercial Litigation and Dispute Resolution, Environmental, Planning and Safety, Corporate, Energy and Natural Resources
The Sustainable Investment Regulation
At the end of August we wrote about European initiatives for green or sustainable financing. On 25 September 2019 the Council of the EU announced that it has agreed its position on a proposed regulation (the “Sustainable Investment Regulation” or “SIR”) on the establishment of a framework to facilitate sustainable investment. This represents a significant step towards a legally-binding standard for sustainable finance.
The SIR is intended to make it easier for businesses to attract capital for sustainable investment from across the EU by establishing criteria for ascertaining what counts as environmentally sustainable investment.
The European Parliament had announced its adoption of the SIR in March 2019. According to the Council's position, the classification scheme should be established by the end of 2021, to ensure its full application by the end of 2022.
An EU-Wide Classification Scheme
The SIR establishes an EU-wide classification scheme, to provide businesses and investors with a common language to identify to what degree economic activities can be considered environmentally sustainable. To this end, the SIR contains the first legal definition of Circular Economy: “maintaining the value and usage of products, materials and all other resources in the economy at their highest level for as long as possible, and thus reducing environmental impact and minimising waste”.
At present, there is no common classification system at EU or global level which defines what is an environmentally sustainable economic activity. More and more Member States were exploring the option of introducing labels for sustainable financial products (such as ‘green’ bonds), using their own national classifications. The proposed regulation is intended to a) reduce fragmentation resulting from market-based initiatives and national practices; and b) reduce "greenwashing", namely the practice of marketing financial products as "green" or "sustainable", when in fact they do not meet basic environmental standards.
In order to qualify as environmentally sustainable, economic activities would have to a) contribute substantively to at least one of the six stated environmental objectives; b) not significantly harm any of those environmental objectives; c) be carried out in compliance with minimum social and governance safeguards; and d) comply with specific technical screening criteria.