The past year has been a year of speculation in sustainable finance. We have been looking for interpretations of how the EU Disclosures Regulation obligates the providers, producers and sellers of investment services and products in practice. Unfortunately, the search has not yielded much results, and until the ESAs bring more clarity to the matter in early 2021, we can only continue to speculate. Originally, the EU technical standards were to be finalised by the end of 2020. The regulation enters implementation in March.
The Taxonomy Regulation, a core pillar of sustainable finance, was adopted in June 2020. The EU was then to finalise the regulation’s technical screening criteria for economic activities that can contribute to climate change mitigation or adaptation by the end of the year, but is now lagging behind. The first criteria will be adopted in early 2021, at the earliest, but it remains to be seen how the member states and the Parliament take to the package in the first place.
Besides the disclosures and taxonomy regulations, the EU sustainable finance agenda is brimming with different projects and reforms related to investment advice, non-financial reporting, the ESG transparency of benchmark methodologies, climate benchmarks, and preparation of the upcoming EU sustainable finance strategy. None of these have kept to the original timetable, and this failing cannot be accredited to the coronavirus pandemic alone.
The last three years have taught us that the pace of sustainable finance regulation must be slowed down. Hasty preparation leads to unclear articles, which are difficult to interpret for implementation or into more specific secondary law. In the words of G. K. Chesterton, “One of the great disadvantages of hurry is that it takes such a long time.”
There have been times when the left hand hasn’t known what the right hand is doing; closely related legislative changes have been simultaneously prepared, resulting in conflicting instructions and requirements for companies. Take, for example, the criteria for sustainable investing products: relevant conditions are found scattered across the EU Ecolabel drafts, the Disclosures Regulation, the MIFID II draft amendments, and the Taxonomy Regulation. Navigating these crosscurrents is not an easy task.
Legislative work on sustainable finance is trying to find a balance between two objectives: increasing the volume of investments into sustainable economic activities, and tightening the criteria for sustainability to prevent greenwashing. Hopefully, the renewed sustainable finance strategy is more successful in combining these objectives than the previous action plan. This will require careful preparation that takes the time to examine the interlinked effects of the different pieces of regulation.