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October 19, 2022

Regulatory Briefing: EU advisers flag ESG rules’ data and consistency issues

The Platform on Sustainable Finance has published a summary of urgent and longer-term recommendations to tackle data and user challenges in sustainable finance disclosures and the EU taxonomy.

The platform has proposed the creation of an online channel that enables industry participants to suggest revisions to the existing criteria in the EU taxonomy based on implementation or usability issues. The proposal underpins the need by the European Commission to ease the regulatory burden of upcoming sustainable finance reporting requirements.

In its 178-page-long report, the platform also recommends a review on the usability of “do no significant harm” criteria, and supplementary guidance on their use internationally. It found that the criteria in the taxonomy are different to those in the Sustainable Finance Disclosure Regulation.

A remaining stumbling block is alignment between different EU regulations, such as the Non-Financial Reporting Directive, which is being replaced by the Corporate Sustainability Reporting Directive, and the Corporate Sustainability Due Diligence Directive.

The importance of policy consistency across the EU’s sustainable finance framework had been flagged in another report by the platform, on minimum safeguards. This noted that under SFDR, the mandatory social principal adverse impacts are not entirely aligned with minimum safeguards.

Red flags. The summary of recommendations is classified under high, medium and low categories depending on the urgency in addressing implemented sustainable finance reporting obligations.

Among the high priority issues is the recommendation to give the European Securities and Markets Authority the means to carry out data validation checks, to ensure that high-quality, reliable and usable information is reported alongside the taxonomy. The proposal would also allow the authority to reject data that fails to comply with the minimum requirements.

The quality of reported data is particularly concerning when companies have to rely on estimates because no other information is available. The platform therefore cautions against the use of carbon estimates in determining substantial contribution by third parties.

SMEs, VCs and green tech up next. It is currently preparing a separate report on small and medium-sized enterprises as part of its work on data and usability, and is also looking at how derivative instruments could report on the taxonomy. It further recommends that the European Commission provide detailed guidance on how emerging technologies and venture capital firms can consider alignment with the taxonomy.

Crucially, the platform’s views and recommendations do not anticipate any future guidance by the commission, and acknowledges its own views might differ from those of other European supervisory authorities.

Platform’s new team. With the current mandate ending this month, the European Commission has started recruiting new members for the platform’s next mandate, which will run from the first quarter of 2023 to the last quarter of 2024.

The commission has confirmed it will establish dedicated subgroups to address different priorities, including the usability of the taxonomy and the wider EU sustainable finance framework. Other issues include the development of additional taxonomy technical screening criteria and potential revisions of criteria “where appropriate”, as well as the monitoring of capital flows into sustainable investments.

The new team will consist of 35 members at most, and interested parties have until until November 9 2022 to submit their application.

 

A service from the Financial Times