Sustainability Blog #8

Legislation and regulation

The Sustainable Finance Disclosure Regulation (SFDR) has applied since 10 March 2021, and its implementing provisions - the Regulatory Technical Standards (RTS) - since 1 January 2023. As it’s clear that because this is a pretty new regulation, it has many gaps and uncertainties. Therefore, how to interpret it is still uncertain. The European Commission and the European Supervisory Authorities (ESAs) have therefore published guidance, interpretations and guidebooks over the last couple of years with the goal of making the process of implementing the SFDR as painless as possible.

This process is ongoing. On 5 April, the European Commission published a Commission Decision answering questions raised by the ESAs on the interpretation of the SFDR, together with amendments to certain answers the Commission had previously given on the same topic. Some important answers and clarifications were given, especially about the definition of sustainable investments set out in Article 2 para. 17. Moreover, some clarification was offered in the context of the ‘economic activities’ in the definition of sustainable investment set out in Article 2 para. 17, the SFDR seems to target cases in which funds are allocated to a specific project or activity, or to a company engaged in one single type of activity. However, financial market participants covered by the SFDR can invest in funding instruments that do not specify how proceeds are used, such as the general equity or debt of an investee company. Also, while a sustainable investment must meet the key parameters in Article 2 para. 17, the SFDR does not set any minimum requirements or prescribe specific methodologies. You can find the entire Commission Decision with all the answers here.

On 25 April, European Council also announced that it had adopted a series of new acts which are a part of the Fit for 55 plan, which aligns the EU’s policies with its commitment to reduce its net GHG emissions by at least 55% by 2030 compared to 1990 levels and to achieve climate neutrality in 2050.

The new laws adopted on Tuesday include the establishment of the new EU Carbon Border Adjustment Mechanism (CBAM), aimed at avoiding “carbon leakage,” a situation in which companies move the production of emissions-intensive goods to countries with less stringent environmental and climate policies. CBAM targets the import of carbon-intensive products to prevent offsetting the EU’s greenhouse gas emissions reduction efforts through imports of products manufactured in non-EU countries where climate change policies are less ambitious. It will also help prevent the relocation of the production or the import of carbon-intensive products. 

CBAM is designed to function in parallel with the EU’s Emissions Trading System (EU ETS) which was also updated on 25 April. Sectors covered by the ETS (primarily energy-intensive industry sectors) are obliged to reduce their emissions even further than before. As stated in the provisional political plan, by 2030 these sectors are required to reduce their CO2 emissions by 62% compared to 2005 levels. Under the current ETS, energy-intensive industries and the power generation sector can purchase so-called "free allowances" to cover their carbon emissions. Also, under the new regime, the maximum number of free allowances is planned to be reduced gradually by 4.3 % per year from 2024 to 2027 and 4.4 % from 2028 to 2030, resulting in higher costs of polluting in Europe.

The EU Parliament and Council further agreed to establish a Social Climate Fund to help Member States cushion the impact of the newly established ETS for the buildings and road transport and fuels in additional sectors. The fund will reach approximately € 65 billion funded from the revenues generated by the ETS and should support vulnerable households, micro-enterprises and transport users from 2026 to 2032.

On 19 April 2023, the European Parliament voted for the EU Deforestation-Free Products Regulation (EUDR). While no country or commodity will be banned, companies will only be allowed to sell products in the EU if the supplier of the product has issued a so-called “due diligence” statement confirming that the product does not come from deforested land or has led to forest degradation, including of irreplaceable primary forests, since 31 December 2020. As requested by the EP, companies will also have to verify that these products comply with relevant legislation of the country of production, including on human rights, and that the rights of affected indigenous people have been respected. The text now also has to be formally endorsed by Council. It will then be published in the EU Official Journal and enter into force 20 days later. 

News and reports

On April 4, Climate Bonds Initiative issued a new report called ‘101 Sustainable Finance Policies for 1.5 °C’ which outlines how policymakers around the world can facilitate the rapid, robust, and credible transition of global economies into a net zero future. You can find the report here.

On April 20, UNDP issued its annual report for 2022 on the progress in the last year in terms of achieving Sustainable Development Goals. You can find the annual report here.