Recommendations on EU Sustainable Finance Regulations
The International Capital Market Association (ICMA) releases recommendations on EU sustainable finance regulations, aiming to provide advice on simplifying EU regulations.
The ICMA is an important participant in the 2018 EU Action Plan on Sustainable Finance and the 2021 Strategy for Financing the Transition to a Sustainable Economy and has provided a series of recommendations for sustainable finance regulations.
Related Post: EU Platform on Sustainable Finance Proposes Simplifying EU Taxonomy
Overall Recommendations on EU Sustainable Finance Regulations
The ICMA believes that the EU Taxonomy, the Corporate Sustainability Reporting Directive, and the Sustainable Finance Disclosure Regulation are the most in need of changes in sustainable finance regulations, with the EU Taxonomy serving as the foundation. The availability of Taxonomy and the diversity of information are the focus of revision.
The ICMA proposes the following key measures:
- To address the usability challenges in the implementation process of the EU Taxonomy, it is recommended to limit mandatory disclosure obligations to the climate change targets of large, listed companies and develop equivalent standards for other market taxonomies.
- The information disclosure of the Corporate Sustainability Reporting Directive focuses on basic data points and maintains consistency with international standards.
- Simplify sustainable financial disclosure regulations to avoid confusion with corporate sustainability reporting directives.
- Maintain a flexible definition of sustainable investment and avoid single restrictions on sustainable investment under the EU Taxonomy.
Recommendations on Individual EU Sustainable Finance Regulations
The ICMA has put forward suggestions for the three individual sustainable finance regulation mentioned above:
EU Taxonomy
More than 1900 non-financial and financial enterprises have disclosed information based on EU Taxonomy, but non-compliance in disclosure is about 40% to 50%. The consistency between different industries in non-financial enterprises is weak, and few enterprises disclose environmental goals beyond climate. There are differences in the calculation methods for information disclosure of financial enterprises, and the numbers that comply with the Taxonomy are lower. The recommendations are as follows:
- Restrict mandatory information disclosure obligations to climate change targets of large, listed companies, disclose revenue and capital expenditure indicators only after passing materiality tests, and remove operational expenditure indicators.
- Add voluntary disclosure standards for transition activities to avoid additional disclosure obligations.
- Actively evaluate the equivalence between the taxonomies of other jurisdictions and the EU Taxonomy.
Corporate Sustainability Reporting Directive
The Corporate Sustainability Reporting Directive requires companies to disclose a significant amount of information after materiality evaluation, which may have an impact on stakeholders such as investors. The ICMA believes in simplifying the European Sustainability Reporting Standards and proposes the following recommendations:
- Adopt simple reporting standards, reduce data points and disclosure requirements, while not compromising dual materiality.
- Consider developing materiality evaluation methods for specific industries and providing case studies to enable companies to provide targeted disclosures.
- Increase quantitative indicators that are helpful to investors and reduce qualitative indicators.
- Provide a legal safe harbor for enterprises to support sustainable information disclosure without the need for limited authentication.
Sustainable Finance Disclosure Regulation
The Sustainable Finance Disclosure Regulation imposes a significant disclosure burden on financial enterprises, with a lack of definition of key concepts and weak data availability. The SFDR should be simplified, with a focus on material issues and avoid duplication with other regulatory policies. The SFDR should also be consistent with the ESG fund naming rules published by the European Securities and Markets Authority. The recommendations are as follows:
- Reduce the number of disclosures, focus on material issues, and consider the data availability of future international disclosure standards.
- Develop a single disclosure for fund products based on the percentage of enterprise risk exposure to credible transition plans.
- Expand the scope of application of the definition of sustainable investment (beyond the definition of the EU Taxonomy).
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