European Commission updates sustainable finance framework

The European Commission has made changes to the EU Taxonomy and has proposed new rules for ESG ratings providers to be regulated under the European Securities and Markets Authority (ESMA).

These updates are designed to:

• Align the sustainable finance framework for companies wanting to invest in their transition to sustainability
• Improve the use of the sustainable finance framework, in line with the European Green Deal objectives.

The detail
Proposed regulation aims to improve reliability and transparency of ESG ratings activities with new organisational principles and rules to help avoid conflicts of interest, enabling investors to stay informed and make good decisions on sustainable investments.

ESG ratings providers for investors and companies in the EU will also need to be authorised by ESMA under the proposal.

Further, the Commission has updated the EU Taxonomy Climate Delegated Act to add not previously included economic activities contributing to climate change mitigation and adaptation – particularly in manufacturing and transport sectors. The additions encompass all six environmental objectives and more economic sectors and companies.

The information is largely informed by the Platform on Sustainable Finance, published in March and November 2022.

To accompany this, the EU Taxonomy criteria for economic activities making a substantial contribution to one or more of the non-climate environmental objectives has been updated to include:

• Sustainable use and protection of water and marine resources
• Transition to a circular economy
• Pollution prevention and control
• Protection and restoration of biodiversity and ecosystems.

The road ahead
The EU Taxonomy Delegated Acts have been approved in principle, with the expectation of application in January 2024.

The proposal to regulate ESG ratings providers will be discussed by the European Parliament and Council.