The proposals published by the European Commission's Technical Expert Group (TEG) on areas such as a taxonomy to support sustainable investing and combat climate change by introducing climate benchmarks and ESG disclosures has been broadly welcomed by the European Fund and Asset Management Association (Efama), albeit with caveats as to the practicalities of implementing the proposals amid ongoing questions around ESG data quantity and quality.
In a statement, the chief European fund industry body said: "We welcome that the TEG proposals on the EU taxonomy include transitioning activities which are key to ensure the success of the taxonomy and to enable a transformation towards a sustainable economy."
"While our members are hopeful that the TEG proposals will facilitate science and evidence based investments in green activities, concerns remain about how to translate this into a user-friendly system that can be readily applied by the financial services industry."
"In any case, financial product disclosure based around the taxonomy needs to be underpinned by comprehensive and reliable data at the company and issuer level - otherwise the taxonomy framework, regardless of strength of intention or quality of design, would be impossible to use without the risk of misleading end investors. While we welcome the revision of the Non-Financial Information guidelines, it may not be sufficient as the guidelines are not binding."
Since May last year, when the TEG was appointed by the EC, it has been working to develop solutions in four key areas to support the Commission's stated objectives for sustainable investments:
- an EU classification system - the so-called EU taxonomy - to determine whether an economic activity is environmentally sustainable;
- an EU Green Bond Standard;
- methodologies for EU climate benchmarks and disclosures for benchmarks; and
- guidance to improve corporate disclosure of climate-related information.
In December, the TEG published a first round document of activities it deemed significant contributores to climate change, and hence the target of climate change mitigation activities, including screening criteria for investors. The feedback period on the proposals ended on 9 January 2019. Since then it has engaged with additional "experts" to develop "technical screening criteria for the second round of climate change mitigation and adaption activities".
Subsequently, on 18 June, the TEG published its report on the EU Taxonomy, incorporating elements of the feedback received. As noted by the EC, "the report is accompanied by a short user guide, which provides a quick overview of what the taxonomy is, what it is not, and how to use it in practice, and by a summary of the technical report".
Further feedback is being sought by the TEG over the summer ahead of a final report. However, given the recent European elections, the Commission also notes that final measures included in the taxonomy are subject to negotiations between the Council of the EU and the European Parliament as to the legislation required to make the taxonomy law. The Commission said it is "committed to consult hte public on any measures it will propose under this framework".
Also published on 18 June by the TEG was its interim report on climate benchmarks and benchmarks' ESG disclosures. This follows work done by the TEG to define minimum standards for benchmarks that are intended to support the EU's response to the Paris Agreement. The disclosure requirements would cover all aspects of ESG - environmental, social and governance.
Following publication of its interim report into the benchmarks and ESG disclosures, the TEG has announced a feedback period of six weeks. That feedback will be used to publish a final version of the report by September, after will the EC will issue as so-called delegated act that will build on the work done by the Group. A formal consultation will take place on the proposed delegated act.
In terms of the Green Bond Standard, the TEG published an interim report in March 2019, followed by a feedback period that ran from 6 March to 7 April. Subsequently, on 18 June, the TEG published a report on EU Green Bond Standard. Further work is now expected to be undertaken on accreditation of so-called external verifiers. Additionally, the TEG will take into account parallel initiatives, such as the Texonomy and the proposed EU ecolabel, and work being done globally by the ISO (International Organization for Standardization), to ensure that the Green Bond Standard is most relevant.
Looking ahead, the EC is hosting a meeting on 24 June, which it is labelling a 'stakeholder dialogue on sustainable finance', and which is seen as integral to the issue of three TEG reports just published.