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The new rules are oriented into future: one includes a climate-transition “indication points” (in the Commission’s tem it is “benchmarks”), and another created a specialized investment portfolio. Both rules are instigated by the Paris (2015) agreements on limiting global temperature increase to 1.5˚above the pre-industrial levels.

The innovation’s positive aspects have been quickly grasped by the states; suffice it to say that the first ideas of the new rules were proposed by the Commission only in May 2018. Besides, the rules are also supporting the ideas of the Capital Market Union (CMU) aimed at connecting financial market with the economy needs and the EU and the states’ agenda for sustainable development.  The EU-2030 sustainable agenda in: https://ec.europa.eu/europeaid/policies/european-development-policy/2030-agenda-sustainable-development_en

New financial mechanism to support sustainability

However, it is more than ideas of the European capital markets union, CMU by which the EU intends to globally lead in sustainability; the new rules represent a shift and “scale up” private investment towards a better achievements of the the sustainability development and Paris (2015) Climate Agreement’s objectives.

In May 2018 the Commission presented a series of legislative measures that follow up to the first ever EU Action Plan on Financing Sustainable Growth, which will allow the financial sector to throw its full weight behind the fight against climate change.

- The legislative measures in: http://europa.eu/rapid/press-release_IP-18-3729_en.htm;

- On the EU Action plan on financing sustainability in: 

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0097&from=EN

The proposed “regulated benchmarks” for low-carbon investment strategies also include: a) establishing a unified EU classification system ('taxonomy') of sustainable economic activities; and b) measures to improve disclosure requirements related to sustainability risks and opportunities. Investors will benefit from two “benchmarks” to pursue their ambitious climate strategies; in this way the member states will activate the means to finance sustainable growth and re-orient capital flows towards sustainable investment   

Vice-President responsible for Jobs, Growth, Investment and Competitiveness, Jyrki Katainen, underlined that “the agreement demonstrated that the EU sustainable finance agenda and a stronger capital market union can work hand in hand”. Besides, he added, the EU was becoming more attractive for investors by setting high disclosure standards and paving the way for long-term sustainable investment policies.   

Voluntary labels

Benchmarks have an important impact on investment flows: many investors would rely on them in creating investment opportunities, in measuring performance of investment products and in asset allocation strategies.

The two new benchmark categories are voluntary labels designed to orient the choice of investors who wish to adopt a climate-conscious investment strategy. The climate-transition benchmark will offer a low-carbon alternative to the commonly used benchmarks.

The new labels’ importance is designed to give additional assurances to avoid “green-washing”, i.e. that investors are deceived by misleading or unsubstantiated claims about the environmental benefits of a benchmark.

Separately, the EU institutions also agreed to grant providers of “critical benchmarks” (e.g. interest rates such as Euribor or EONIA) two extra years until 31 December 2021 to comply with the new EU benchmark regulation requirements.  

Perspectives

A technical expert group will now advise the European Commission on selecting companies eligible for inclusion in the new benchmarks. The group will also advise on whether to exclude certain sectors of economic activity from the “specialised” Paris-aligned benchmark. After that, the European Commission will propose delegated rules that cover the composition of both benchmarks in further detail.

Given the crucial importance of third-country benchmarks for EU companies, the extra two years for benchmarks produced outside the EU was also introduced to provide additional time for work with non-EU regulators on how these benchmarks can be recognised as equivalent or otherwise endorsed for use in the EU states.  

The proposal will be finalized by the Permanent Representatives Committee (COREPER) of the Council of Ministers and the European Parliament with the formal adoption of the new rules before they can enter into force.

Thus, the mechanism is in place: the European institutions have made steps to formulate the “indication points” on financing low-carbon economies; the member states just have to approve the new rules.  

General reference: Commission press release on sustainable finance, 25.02.2019 in:

http://europa.eu/rapid/press-release_IP-19-1418_en.htm?locale=en