Despite this year’s barrage of sustainable finance rules and requirements, 2024 looks likely to dish up more of the same.
We look ahead to some of the key sustainable finance developments likely to impact companies, investment funds, investment firms and benchmark users/providers in 2024.
1. Finalisation of the Corporate Sustainability Due Diligence Directive (CS3D) – Q1 2024
Following agreement of the as-yet-unavailable compromise text on 14 December 2023, CS3D is expected to be adopted in Q1 2024 with a 2-year transposition period and a first application date of 3 years post entry into force.
CS3D will apply, on a phased basis, to (i) EU companies with >500 employees and a global net turnover >€150m, (ii) non-EU companies with >€150m net turnover in the EU (irrespective of any EU presence) (together ‘large companies’) and (iii) EU and non-EU companies which are not large companies but have >€40m net turnover (in the EU, in the case of non-EU companies, or globally, in the case of EU companies), at least €20m of which was generated in a high-risk sector (including textiles, agriculture, forestry, fisheries, food & beverage, mineral resources) and, in the case of EU companies, had >250 employees (together ‘high-risk sector companies’).
Companies with >1000 employees and >€300m global net turnover and non-EU companies with >€300m net turnover in the EU will be subject to CS3D 3 years post entry into force. The following year, large companies will be in scope and finally, five years post entry into force, CS3D will apply to high-risk sector companies.
Companies’ key obligations under CS3D include the due diligence (identification, assessment, prevention, mitigation, ending and remedying) of actual and potential adverse impacts of the company’s own activities and those of its upstream and downstream chain of activities on the environment and human rights. CS3D also requires in-scope companies to adopt Paris-aligned climate transition plans. Regulated financial services firms are exempt from the due diligence obligation in respect of downstream (investment) activities but are required to report on own operations, upstream value chains and climate transition plans. UCITS and AIFs are specifically exempt from CS3D.
2. Application of the Corporate Sustainability Reporting Directive (CSRD) & the European Sustainability Reporting Standards (ESRS) – from 1 January 2024
CSRD and the ESRS fist apply for financial year 2024 to companies in scope of CSRD’s predecessor, the Non-Financial Reporting Directive (NFRD). NFRD companies must publish CSRD sustainability reports from 1 January 2025. National transposition of CSRD is due by 6 July 2024. See our previous briefings for further details of the scope, application, and key obligations of CSRD and the ESRS (here and here).
3. Taxonomy-alignment reporting by financial sector companies begins – from 1 January 2024
As well as a tool for classifying economic activities as environmentally sustainable, the EU Taxonomy Regulation (Taxonomy) requires reporting (in a company’s management report) of the extent to which a company’s activities qualify as sustainable activities under the Taxonomy (Taxonomy transparency rules). Companies subject to NFRD/CSRD are also subject to the Taxonomy transparency rules, which are being introduced on a phased basis for financial and non-financial companies.
From 1 January 2024, the Taxonomy transparency rules require those financial companies (asset managers, banks, investment firms, insurers) subject to NFRD (i.e., large public-interest entities with >500 employees) to report on their level of sustainable activities, as determined using the Taxonomy’s performance criteria for activities that substantially contribute to climate change mitigation or adaptation (Taxonomy-aligned activities). In addition, such companies must report on the extent to which their activities are capable of contributing to non-climate environmental objectives (biodiversity, water/marine resource protection, circular economy, pollution prevention) as determined using the list of activities eligible for such assessment under the Taxonomy (Taxonomy-eligible activities).
4. Adoption of Guidelines on Enforcement of Sustainability Information – Q3 2024
On 15 December 2023, ESMA launched a consultation on guidelines for supervising compliance by listed issuers with CSRD sustainability reporting rules (the Guidelines). The Guidelines are based on, and aligned with, ESMA’s Guidelines on Enforcement of Financial Information and are to be used for regulatory enforcement of sustainability information under the Transparency Directive (as amended by CSRD). While targeting regulators, the Guidelines may prove a useful tool for listed issuers (and indeed other entities) in scope of CSRD, as a guide to regulators’ approach to the supervision and enforcement of sustainability reporting. The consultation on the Guidelines runs until 15 March 2024 and ESMA expects to publish final Guidelines by Q3 2024.
5. Only deforestation-free products to be sold in/exported from the EU – December 2024
On 29 June 2023, the EU Deforestation Regulation (the Regulation), limiting the sale/export of products derived from relevant commodities of cattle, cocoa, coffee, oil palm, rubber, soya and wood (‘relevant commodities/products’), was published and is applicable from 30 December 2024. The Regulation applies to operators and traders (both legal and natural persons) offering products in, or exporting products from, the EU and limits such activities in respect of relevant products/commodities to those which are deforestation-free, produced in accordance with rules applicable in the country of production and covered by a due diligence statement. Deforestation-free products are those made using relevant commodities produced on land not subject to deforestation after 31 December 2020 and in the case of products made using wood, the harvesting of the wood has not induced forest degradation after 31 December 2020.
While, financial services firms are not initially in scope, a review clause requires assessment by 30 June 2025 of any need to extend the scope of Regulation to include such firms.
6. European Green Bond (EUGB) Standard – available from 21 December 2024
On 20 December 2023, the EU Green Bond Regulation (the Regulation) entered into force setting down a voluntary standard for use by issuers of green use of proceed bonds where the proceeds are (subject to limited flexibilities) allocated to Taxonomy-aligned environmentally sustainable activities. Use of the EuGB designation is reserved to bonds issued in compliance with the Regulation, which includes pre- and post-issuance transparency rules, regulated prospectus rules, and a new registration system and supervisory framework for external reviewers which are required to review issuers’ reports. The Regulation is applicable from 21 December 2024.
Investment Funds and Investment Firms
1. Commission to revise SFDR Level 2 – H1 2024
On 4 December 2023, the European Supervisory Authorities (ESAs) published regulatory technical standards (RTS) amending the existing SFDR delegated measures (Level 2). The RTS are now subject to a three-month scrutiny period before being adopted by the Commission as Level 2 revisions. Current estimates are for the revisions to be adopted in H1 2024, with an application date in H1 2025. The RTS include revisions to the principal adverse impact (PAI) indicators, disclosures, and calculations; new sustainable investment website disclosures and calculation methodologies; new GHG emission reduction target disclosures; amendments to the mandatory pre-contractual and periodic reporting templates; and new requirements for machine readable disclosures. See our previous briefing (here) for further details.
2. ESMA to issue rules on the use of ESG terms in fund names – Q2 2024
In a press release dated 14 December 2023, ESMA confirmed it expects to publish final Funds’ Names Guidelines (the Guidelines) in Q2 2024, subject to the timing of publication of revisions under the AIFMD and UCITS Review. The publication of the Guidelines is linked to the AIFMD and UCITS Review because one outcome of that process is to provide ESMA with new powers to issue guidelines in respect of fund (AIF and UCITS) names considered unclear, unfair or misleading.
The draft Guidelines tabled for consultation in November 2022 include quantitative and qualitative thresholds for the use of ESG, sustainability, transition and impact-related terms in fund names. ESMA noted in its recent press release that it will amend the consultation version of the Guidelines (i) to replace the 50% minimum sustainable investment requirement for funds with sustainability-related terms in the fund name with a requirement to ‘invest meaningfully’ in sustainable investments in line with investor expectations based on the fund’s name. Such funds would additionally be subject to a minimum investment of 80% in sustainability characteristics/objectives and to compliance with the Paris-Aligned Benchmark (PAB) exclusions; (ii) to require funds with transition-related terms in the fund name to apply the Climate Transition Benchmark (CTB) exclusions (being a reduced set when compared to the PAB exclusions) and (iii) to exempt funds with social and/or governance-related terms in the fund name from the requirement to apply PAB exclusions.
Once published, the Guidelines would apply to new funds 3 months after publication of translated versions, while existing funds would have a further 6 months in which to ensure compliance.
3. Commission to issue SFDR amendment and enhancement proposals – Q2 2024
The Commission’s consultation on SFDR revisions and enhancements concluded on 15 December 2023 and the Commission expects to publish proposals, taking account of the feedback received, by Q2 2024. See our previous briefing (here) for further details of this development.
4. ESAs to advise on prevalence and supervision of greenwashing risk – May 2024
In May 2022, the Commission tasked the ESAs with investigating and advising on the supervision of greenwashing risks. A progress report was released by each of the ESAs in May 2023, with final reports due to the Commission by May 2024. See our previous briefing (‘ESMA Defines and Cites Myriad Examples of Greenwashing’ in our June 2023 Update) for further details. On 19 December 2023, ESMA published a report on ‘The financial impact of greenwashing controversies’ in which it concludes that greenwashing controversies increased between 2020 and 2021 (the period under review), allegations are concentrated in the oil & gas, food & beverage and financial services sectors, there is no clear, systematic negative financial impact on firms from greenwashing controversies but there is a clear need for regulatory guidance and supervision of sustainability-related claims.
5. ESMA assessment of funds sector’s compliance with sustainability disclosure rules – concludes September 2024
ESMA’s Common Supervisory Action (CSA) to assess asset managers’ compliance with SFDR and the Taxonomy, which launched in July 2023, will conclude in Q3 2024. Asset managers can reasonably expect the standard post-CSA engagement and publication of findings by the Central Bank and/or ESMA. See our previous briefings (here and here) for further details of this CSA.
6. ESMA to assess MiFID firms’ compliance with sustainability preference rules – during 2024
On 3 October 2023, ESMA launched a CSA to assess intermediaries’ application of the sustainability preference rules focussing on how firms collect such preferences, the arrangements firms have in place to understand and correctly categorise products with sustainability features, how firms ensure respect of clients’ sustainability preferences and how any sustainability-related objectives a product is compatible are specified as part of a product’s target market assessment. The CSA will be conducted throughout 2024 and firms can expect engagement from the Central Bank in this regard.
7. ESMA considering guidance/revisions to MiFID Guidelines on sustainability preference rules
Respondents had until 15 September 2023 to respond to a Call for Evidence (CfE) by ESMA on firms’ application of sustainability preference rules in the suitability assessment and product governance arrangements. Feedback to the CfE may inform the publication of ESMA Q&A and/or changes to the ESMA Suitability and Product Governance Guidelines.
1. ESMA to assess benchmark administrators’ compliance with ESG disclosure rules – throughout 2024
On 13 December 2023, ESMA published notice of its intention to launch a Common Supervisory Action (CSA) to assess compliance by supervised (EU and non-EU) benchmark administrators with the ESG disclosure rules under the Benchmarks Regulation; specifically, the disclosure of ESG factors in the benchmark statement and in the benchmark methodology and disclosures on climate benchmark methodologies. The CSA will be carried out during 2024 and conclude in Q1 2025.
2. EU Taxonomy-Aligning Benchmarks proposed for consultation – concludes March 2024
On 12 December 2023, the EU Platform on Sustainable Finance published, for consultation, a proposal for the establishment of two types of voluntary Taxonomy-aligning benchmarks with risk and opportunity objectives combining to target the greening of CapEx, reduction of greenhouse gas (GHG) emissions and transition to a low-carbon economy.
The two types proposed are Taxonomy-aligning benchmarks (TABs) and, the more ambitious, TABs which exclude specific fossil fuel related activities (TABex). The minimum standards for both TABs and TABexs, include at least 7% on average per annum reduction in CO2e intensity until 2050 and at least 5% increase in Taxonomy-aligned CapEx per annum, with a minimum exposure to CapEx Securities is at least equal to equity market benchmark exposure, and an additional minimum set of exclusions for TABExs relating to coal, oil and gas activities. Respondents can submit feedback (here) to the Platform’s consultation until 13 March 2024.
3. PAB/CTB only available to EU benchmark administrators – March 2024/January 2026
On 17 October 2023, the Commission adopted revisions to the Benchmarks Regulation (BMR) following a REFIT review (BMR REFIT). A consultation on BMR REFIT concluded on 20 December 2023 and finalised BMR amendments are expected to be published by March 2024 with an application date of 1 January 2026. BMR REFIT prohibits non-EU administrators from using the EU PAB/CTB labels or implying benchmarks’ compliance with the PAB/CTB minimum standards. While BMR REFIT also includes streamlining measures which reduce the scope and benchmark users’ obligations, such proposals are unlikely to impact PAB/CTBs as they focus primarily on non-significant/non-climate benchmarks.
If you require advice on any of the topics raised in this article, please get in touch with the key contact, any of the ESG & Sustainability practice group, or your usual William Fry contact.