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It is at first surprising that the third paragraph of the European Commission’s “Consultation on the Renewed Sustainable Finance Strategy” relates to COVID-19.

Surprising, that is, until you recall that the consequences of the COVID-19 epidemic will overshadow the ability to borrow (and repay) money for decades to come, and that “sustainable finance”, in the eyes of the Commission, cuts across all “ESG” (environmental, social and governance) factors.

The Commission's view of COVID-19

The Commission believes that:

  • The ongoing COVID-19 outbreak shows the critical need to strengthen the sustainability and resilience of our societies and the ways in which our economies function.
  • Similar health emergencies are likely to arise in the future as climate and environmental impacts escalate.
  • The COVID-19 outbreak underscores some of the subtle links and risks associated with human activity and biodiversity loss. Many of the recent outbreaks (e.g. SARs, MERS, and avian flu) can be linked to the illegal trade in, and consumption of, often endangered wild animal species.
  • Experts suggest that degraded habitats coupled with a warming climate may encourage higher risks of disease transmission, as pathogens spread more easily to livestock and humans.
  • It is important to address the multiple and often interacting threats to ecosystems and wildlife to buffer against the risk of future pandemics, as well as preserve and enhance their role as carbon sinks and in climate adaptation.
  • The ongoing COVID-19 outbreak underscores that companies should prioritise the long term interests of their stakeholders.

Background to the Consultation

The background to the current Consultation is a plethora of recently passed and proposed legislation that buttress the EU’s ambitions to mitigate and adapt to climate change. Recent matters include:

  • The “European Green Deal”, which significantly increases the EU’s climate action and environmental policy ambitions and means of financing them .
  • The European Commission has proposed a European Climate Law to turn the political commitment of climate-neutrality by 2050 into a legal obligation.
  • The European Parliament’s declaration of a climate emergency and European Council conclusions endorsing the objective of achieving a climate-neutral EU by 2050.
  • A “taxonomy” of environmentally sustainable economic activities.
  • An EU Green Bond Standard which integrates the taxonomy.
  • Requirements on companies and investors to make disclosures against the taxonomy.
  • A proposed carbon border adjustment mechanism.

Regulatory changes

The Consultation gives some hints about the possibility of regulatory changes in the following areas:

  • Changes to regulations that are perceived as hindering the development of sustainable finance and integration and management of ESG risks into financial decision-making.
  • Increased regulation of ESG rating and benchmarking.
  • Beefed up reporting and discourse requirements in respect of ESG matters, including in respect of capital markets.
  • Legislation to address biodiversity loss.
  • Increased “ecolabeling” for financial products, with enhanced requirements for external verification.
  • Tackling short-termism in investment and promotion of sustainable investment.
  • Tightening up of restrictions on executive pay.
  • Enhanced supply chain due diligence.
  • Regulatory framework for green securitisation.
  • Public incentives for issuers and lenders to boost sustainable investment.
  • Further regulation of financial stability risk.

Comments

The existence of the Consultation comes as no surprise as it has been widely trailed. However, the Consultation document is considerably more wide-ranging than many will have anticipated and seeks answers to 102 questions in total. It will be particularly interesting to see whether the COVID-19-related elements of the Consultation make their way into legislative changes.

Many have already welcomed the suggestion of further tightening of ESG regulation.  However, not all entities are so enthusiastic. One industry body is reported to have highlighted several points:

  • Since the launch of the original 2018 Action Plan, a series of other environmental legislative initiatives have led to some inconsistencies which the renewed sustainable finance strategy should address.
  • Economic disruption caused by the COVID-19 outbreak should focus sustainability on the social factor to facilitate economic stabilisation. But is now is the right time to focus on new governance initiatives, especially given the existence of corporate governance and stewardship codes?
  • Financial literacy and promoting sustainability awareness seem to be somewhat sidelined in the consultation.

We also note that moving from the relatively modest 2018 Action Plan to addressing the range of matters trailed in the current Consultation will require a step change in resources.

Next steps

These kinds of consultations issued by the Commission generally herald legislative changes. Interested parties have until 15 July to make submissions.