And no actor wants to be left behind when Institutional Investors indicate that, for most of them, non-ESG products are a no-go. We plan to accompany you through the 2021 challenge, providing you with fresh news on markets and regulatory developments as well as monthly deep dive on practical or strategic challenges as well as market developments perspectives. You do not want to miss the sustainable finance train? Onboard with us and subscribe to our Sustainable Finance community.
Sustainable Finance Disclosure Regulation (SFDR) will be implemented from 10 March 2021. SFDR applies to all financial products, managers and advisers. It requires transparency on how ESG risks are being integrated in the investment decisions and how adverse sustainability factors (PAI) are being considered. It also requires transparency on sustainability objectives, processes and achievements of financial products promoted as ESG or sustainable. Level 2 measures precising the content of the PAI disclosures as well as the disclosures at products level as proposed by the European regulators in February 2021 shall be endorsed by the European Commission in Q2 2021 and implementation by 1 January 2022.
Taxonomy regulation will be implemented from 1 January 2022. It provides a toolbox of criteria and methodologies to determine when an economic activity is environmentally sustainable. During 2021, we expect the finalisation of the technical screening criteria in relation with climate change mitigation and climate change adaptation. Such criteria should have been finalised by 31 December 2020 but debates over key aspects such as sectorial and transitioning led to some delays. They were subject to public consultation in 2020 and will apply as of 1 January 2022. Criteria for the remaining four environmental objectives (water, circular economy, pollution prevention, biodiversity) shall also be finalised by 31 December 2021, with an implementation date of January 2023. Companies subjected to non-financial reporting such as very large listed entities, banks and insurance companies shall include in their non-financial report the degree of alignment of their activities with the Taxonomy criteria. Delegated acts on the content of such disclosures will be determined by 1 June 2021. ESMA and EIOPA have already been consulting on such rules for listed entities, asset managers, banks and insurance companies. RTS on how green financial products will also be required to disclose their taxonomy alignment is also expected in 2021.
Amendments to delegated acts of MiFID2, IDD, UCITS, AIFMD, Solvency 2 are also foreseen, introducing specific sustainability requirements in relation with investors sustainability preferences, product governance, target market, operating conditions and risk management processes. Such changes were subject to public consultation in June 2021, leading to intense debate on sustainability preferences. Final texts could be expected to be released by the European Commission during the first quarter of 2021, with potential implementation in 2022.
The key challenge to be addressed in the coming years is in relation to the availability of complete and reliable ESG data. The main source of ESG data is the non-financial reports issued by companies but, under the current version of the Non-financial reporting directive (NFRD), only very large public- interest entities are required to report on non-financial information. They may choose what to report (or not report) on and there are no European requirements to get the content reviewed by a third party. Recognising that lack of data could totally undermine the entire sustainable finance action plan, the European Commission initiated a review of NFRD. Following a public consultation and review work in 2020, the EFRAG was tasked with mandates in this regard.. Proposal to amend NFRD is expected towards the end of Q1 2021. Non-financial information is transformed into ESG score or ratings by specialists’ agencies –disparities in methodologies, leading to disparity in ratings or scores, has attracted attention from regulators, calling for more harmonisation and, potentially regulation, of ESG ratings. Finally, in order to improve accessibility to financial and non-financial data, the European Commission has initiated works in relation with the creation of a European Single Access Point (ESAP) to financial and non-financial information. A proposal shall follow in Q3 2021.
From a Luxembourg competitive perspective, we want to draw attention to two further regulatory changes in 2021:
Finalisation of the retail financial products eco-label: the rules for obtaining EU Eco-label for retail financial products (Taxonomy alignment) shall be finalised and endorsed in 2021 –a welcomed endorsement of the LuxFlag initiative.
European green bond standards developments: a regulation proposal is expected beginning 2021 –a major opportunity for the Luxembourg Stock Exchange and the Luxembourg Financial Center to further consolidate its lead in the space of Green Bonds.
Whilst the authorities continue to deliver intensively on Sustainable Finance actions planned in 2018, the EC is also preparing the next year's roadmap with the Renewed Sustainable Finance Action Plan. As indicated in the related 2020 consultation, the EC wants to go further and to move faster. The plan is expected to be released in Q1/Q2 2021.
For the picture to be complete, one shall also follow-up the various international initiatives such as the Task Force on Climate-related Financial Disclosures (TCFD), the International Sustainable Finance Platform or international initiatives in the context of non-financial reporting standards alignments. Even though these initiatives' ambitions do not match European’ ones in terms of scope and timing, they shall remain on the under radar screen of any global players.
Focus on product and entity disclosures to comply with the 10 March 2021 deadline. This is a must have and forms the basis for any business model change and opportunity in terms of ESG products distribution and ESG services.
From 10 March 2021 to 1 January 2022, get ready for SFDR next deadline (1/1/22) and prepare detailed disclosure and reporting for ESG and sustainable products.
Review corporate ESG strategy: this review is partially triggered by regulatory requirements based on the PAI reporting but entails also a conscious business choice regarding credibility of your own positioning and alignment to your clients’ and stakeholders’ expectations.
Understand and endorse changes to prudential rules by either proposing the right products (asset managers) or changing your organisation and consider competitive actions to take in terms of embedding ESG (risks) consideration within internal processes and adapt processes accordingly (MiFID, AIFMD, UCITS, but also ECB, EBA, EIOPA, and NCAs).
Taxonomy alignment/reporting and Taxe d’abonnement: Asset managers subject to taxonomy disclosure (green products, very large listed companies, banks and insurers) shall implement taxonomy data reporting and alignment calculation in 2021, as the first deadline is also 1 January 2022. And for Luxembourg investment funds (UCITS and Part 2 funds), wishing to benefit from a reduction in “taxe d’abonnement”, consideration shall be given to accelerating taxonomy implementation. This could be subject to assurance review.
Get the data right: ESG data is both complex in nature (qualitative, broad scope and new in terms of data management) as well as critical to enable the organisation to master the compliance challenge (disclosure, risk management and investment selection/advice) and to take advantage of a competitive change in the market. Decentralised and manual approaches are not leading to success.
Don’t rely on the Group or Regulators to solve the issue in your place.
Don’t wait and start communicating with your stakeholders to understand expectations and anticipate needs. ESG is a structural change not a temporary compliance matter.
By the PwC Sustainable Finance Core Team