Proposal of Regulation EU on the establishment of a framework to facilitate sustainable investment (Part 1)

Old Chelsea Bridge - Camille Pissarro

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The European Union (EU) is at an advanced stage (second reading) to adopt during 2020 the EU Regulation on the establishment of a framework to facilitate sustainable investment (SRI Regulation), which will be a central instrument for the future of sustainable investments in the EU.

The purpose of the SRI Regulation is to establish the criteria for determining whether an economic activity is sustainable from an environmental point of view, in order to determine the degree of environmental sustainability of an investment. As can be seen, it only considers environmental criteria, although the ESG criteria that compose SRI includes environmental, social and corporate governance criteria. It should be noted, however, that a mention has been added to the current draft to incorporate social criteria at a later date. In addition, international social standards have been added to the procedure for analyzing sustainable activities. This is a first step in incorporating social criteria into the legislative framework for SRI in the EU. On the other hand, with respect to corporate governance criteria, they are neither included nor planned to be included, but there are already many rules and obligations of the EU and the Member States that regulate this matter. For all these reasons, we can consider the scope of this regulation to be satisfactory.

The EU and the Member States must comply with the provisions of this regulation in all matters relating to the use of ratings, classifications or labels relating to environmental sustainability. Consequently, green or sustainable bonds, sustainable investments, green financial products and any other similar reference in the regulation must respect the rules of the SRI Regulation. This will allow regulatory harmonization and benefit the single market and expansion of SRI in the EU.

The SRI Regulation identifies six environmental objectives for environmental sustainability: 1) climate change mitigation, 2) climate change adaption, 3) sustainable use and protection of water and marine resources, 4) transition to a circular economy, waste prevention and recycling, 5) pollution prevention and control, and 6) protection of healthy ecosystems.

Each of these six objectives will have its own development in the EU taxonomy. This taxonomy is expected to be completed between 2021 and 2022. As of April 2020, the report and final annexes on the taxonomy of the first two targets, which relate to climate change, have been published.

For an activity to be considered environmentally sustainable, it must meet the following criteria:

(a) The activity contributes substantially to one or more of the environmental objectives.
(b) The activity does not cause any significant harm to any of the environmental objectives (do no significant harm "DNSH").
(c) The activity is carried out in compliance with the minimum safeguards, in accordance with international agreements (ILO).
d) The activity complies with technical screening criteria, in accordance with the taxonomy and the delegated acts of development of each of the environmental objectives.

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