The European Union has now successfully implemented three major related regulations:

• Climate Benchmarks Regulation (EU 2019/2089) to enhance the transparency and comparability of benchmark methodologies relating to environmental, social and corporate governance (ESG) metrics, providing investors with clarity on the environmental sustainability of their investments.
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• Sustainable Finance Disclosure Regulation (EU 2019/2088) to re-orient capital flows towards sustainable investments by increasing transparency by financial market participants and advisers on sustainability risks, whilst ensuring a more uniform protection of end investors.
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• Taxonomy Regulation (EU 2020/852) which establishes a harmonised taxonomy to classify financial products as sustainable at EU level, further promoting investments in sustainable activities whilst addressing “greenwashing” concerns.
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A range of ESG-related regulatory measures have since been introduced or announced that affect the manner in which companies operate within the European Union. Keeping up with these can pose challenges for companies that must be compliant with the necessary regulations.

Facing the challenge of keeping up with the regulations

As can be expected when new rules are implemented, there are a number of challenges that firms are encountering when looking to keep up with the EU ESG regulations. These include finding the significant resources needed to compile and report the relevant information and metrics to monitor sustainability and control measures both at firm level and at product level, as well as the difficulties related to product classification.

For example, with fund flows from ESG-conscious investors at stake, there may be internal pressure to classify a product as Article 8 (funds that promote an environmental or social characteristic), or Article 9 (funds that target bespoke sustainable investments), when in fact it should be labelled as Article 6 (funds that do not integrate any kind of sustainability into the investment process). This creates a compliance risk for the business.

On the other hand, other asset managers fear being accused of mis-selling or greenwashing and are cautiously categorising products that could be classified as Article 8 or 9 as Article 6 instead.

This is not helped by a certain lack of clarity about the terms utilised within the SFDR. For example, the definition of an Article 8 product is: “A fund which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.” However, the definition of “good governance practices” is unspecific and open to interpretation, making it difficult to accurately designate a product with complete confidence.

Planning your next steps

With a swiftly changing regulatory environment, seeking professional guidance on remaining compliant is essential. To facilitate this process, Euronext has published its ESG Reporting Guide (Target 1.5°C) for listed companies to help ensure better communication between issuers and investors on all matters related to sustainability.

Conclusion

Not only are organisations facing a number of new or updated pieces of legislation, but they also have to decipher what are often unclear or ambiguous definitions in order to make decisions that they hope will maintain their compliance. While this is a significant time in terms of the EU tackling the issues of climate change through sustainable finance, it is also a challenging period for issuers.

As a company, Euronext is committed to creating environmentally-friendly services and products to help partners and clients contribute to reducing the increase in the planet’s temperature. This forms a key element of Euronext’s “Fit for 1.5°” initiative.  Products include Euronext ESG Bonds, Euronext ESG Funds and Euronext ESG Derivatives.

Euronext’s ESG Advisory service helps you build your sustainability story and improve the market perception of your ESG activities. If you are an issuer or planning an IPO and need help creating or optimising your ESG strategy, you can connect with the ESG Advisory team here.