On 10 March, the first major regulatory change stemming from the EU Action Plan on Sustainable Finance will enter into force: the Sustainable Finance Disclosure Regulation (SFDR). The main objective of the SFDR is to enhance transparency regarding the integration of environmental, social and governance (ESG) factors into investment decisions and recommendations.
Asset managers will be asked to disclose at entity and product level how they incorporate sustainability factors into the products they provide, and they will also be required to disclose how products branded as ‘sustainable’ achieve their sustainability objectives.
But the SFDR is just one step on a long journey of new regulatory initiatives that will have implications for financial industry over the coming years. The next regulatory initiative to be introduced will be the Taxonomy Regulation, which will apply from January 2022. The Taxonomy Regulation will set a unified classification system for environmentally sustainable economic activities. Also in 2022, amendments to MiFID II are expected to be introduced.
Taxonomy Regulation dominates customer dialogues
With the introduction of the new Taxonomy Regulation, Danske Bank will be under obligation to disclose how and to what extent its activities are associated with economic activities that qualify as environmentally sustainable according to the taxonomy. This disclosure must be included in Danske Bank’s general non-financial reporting, and it must be included in non-financial reporting in large corporates that have over 500 employees.
According to Samu Slotte, Global Head of Sustainable Finance, large corporate and institutional customers are following the Taxonomy Regulation closely.
“Many of our institutional customers will be directly affected by the upcoming regulation and are working on implementing necessary measures to accommodate the regulation. However, the most interesting discussions we have with our institutional and with our corporate customers are about how the regulatory agenda on sustainable finance will affect financial flows across equities, bonds and ultimately bank lending.”
Samu Slotte adds that Danske Bank has a strong platform to support its customers in understanding how the financial markets will be affected by the sustainable finance regulation as well as by the overarching ESG trend in finance.
Over the years, Danske Bank has made significant progress in the area of sustainability, with the aim of making sustainability an integrated part of the business and operations – as reflected in Danske Bank’s 2023 Group Sustainability Strategy.
Danske Bank’s leading positions in relation to green bonds and sustainability-linked loans – as well as the strong foundation for integrating environmental, social and governance aspects (ESG) into the investment and lending processes – are examples of tangible progress already made by Danske Bank in this area.
The EU Action Plan on Sustainable Finance
In 2015, the EU and many other nations adopted the UN’s 17 sustainable development goals (SDGs) and signed the Paris Agreement. To ensure that these commitments will be met, the EU developed a plan for a climate-neutral economy. In March 2018, the European Commission adopted an action plan on sustainable finance as part of a strategy to integrate environmental, social and governance (ESG) considerations into its financial policy framework and mobilise finance for sustainable growth. The aim of the action plan is to:
- Reorient capital flows towards a more sustainable economy
- Mainstream sustainability into risk management
- Foster transparency and long-termism
The regulatory outcome of the EU Action Plan
The EU Action Plan on Sustainable Finance consists of several regulatory packages. These include:
Amendments to the Benchmark Regulation (in 2020)
- Two new category benchmarks, comprising low-carbon and positive carbon impact benchmarks. Applicable from 2020
Sustainable Finance Disclosure Regulation (SFDR) (in 2021)
- The SFDR requires financial market participants to disclose how sustainability risks are integrated into the investment processes, to consider principal adverse impact (PAI) of investments on sustainability factors, and to define ESG/sustainability products, i.e. Article 8 and 9 products. Enters into force on 10 March 2021.
MiFID II amendments (expected introduction in 2022)
- The upcoming MiFID II amendments will, among other topics, require financial advisers to include the sustainability preferences of customers in their investment advice.
Taxonomy Regulation (in 2022 and 2023)
- Unified classification system that defines what can be considered as environmentally sustainable economic activities.