The transition to a sustainable society places significant demands on the financial sector.

Few have missed the EU's extensive work towards a more sustainable society. Through the EU's ambitious action plan - The Sustainable Finance Action Plan - expectations regarding the finance sector's role in this transition have increased and been clarified. Part of the plan involves making it easier to obtain funding for sustainable investments and strengthening the resilience of the financial system against sustainability risks. Furthermore, companies and consumers are to be provided with tools and incentives to contribute to sustainable financing of the transition.

Several regulatory initiatives have been developed to support the transition to a sustainable society and affect the financial sector. Some of the most important include:

EU’s taxonomy: The taxonomy is a tool for achieving the EU’s environmental goals and means that environmentally sustainable investments can be identified and compared within a common classification system. For financial companies, this means that companies must disclose their significant exposures to activities that are environmentally sustainable in their management reports. Fundamentally, this involves a number of KPIs and the data used to calculate them. The more detailed disclosure requirements are in the process of being phased in.

EU’s Corporate Sustainability Reporting Directive (CSRD): The CSRD replaces the EU’s Non-Financial Reporting Directive (NFRD) and requires companies to provide a detailed sustainability report regarding environmental issues, social issues and governance (also referred to as ESG reporting) as part of their management report. The sustainability report is based on an EU-wide standard (ESRS) and must be audited by an external auditor or an accredited reviewer. Currently, the ESRS is under development, with an industry-neutral standard expected to be adopted by the European Commission in 2023. Additionally, proposals for sector-specific standards as well as standards for small and medium-sized enterprises (SMEs) and companies outside the EU are to be developed.

EU’s Sustainable Finance Disclosure Regulation (SFDR): The SFDR regulates how investment firms, insurance companies and financial advisors offering financial products must inform their investors and clients about how sustainability factors are taken into account (ESG factors). An important purpose of the information requirements is to increase transparency regarding the sustainability of financial products and reduce the risk of greenwashing. The specific sustainability information must be readily available on the company's website, in disclosures made before contracts are concluded and in regular reports. The information requirements are both quantitative and qualitative and must include what are known as negative sustainability factors PAI (Principal Adverse Impact) at both company and product levels. The implementation of the SFDR is in the final stages of its rollout, with more detailed disclosures to be provided this year.

Disclosure requirements under Pillar 3: The European Banking Authority (EBA) has developed technical standards for the disclosure of ESG risks under Pillar 3. The disclosure requirements cover both qualitative descriptions of ESG risks and quantitative data on climate-related risks, which will be phased in gradually starting in 2023. From 2024 onwards, further data on GAR (Green Asset Ratio) and BTAR (Banking Book Taxonomy Alignment Ratio) is to be disclosed.

Management of ESG risks: In order to enhance financial companies' resilience to ESG risks, requirements for management will be incorporated into companies' risk frameworks, including internal processes for assessing capital needs and conducting stress tests. The EBA's ambition is to develop a consultative package regarding the management of ESG risks and guidelines for stress testing during 2023, with the intention that these guidelines will be established in 2024. Furthermore, the authority aims to develop technical standards for supervisory reporting of ESG risks.

Suitability assessment under MiFID / IDD: Financial companies providing portfolio management and advice have, for some time, had to consider customers' sustainability preferences when they make recommendations or decide to include financial instruments in managed portfolios.

Green Bonds: The opportunity to finance through European green bonds has existed for several years. The European Commission, which has been exploring the possibility of developing a voluntary standard for some time, announced at the beginning of March that a political agreement has now been reached. The voluntary standard means that at least 85% of the proceeds must be allocated to activities that are consistent with the EU Taxonomy.

 

Omeo has gathered the industry's most experienced consultants who can help you with complex issues and various types of projects. We support and guide you in roles as analysts, specialists, and project managers.

In the area of sustainability, we can help with:

• Qualified advice regarding economic, risk, and finance-related issues
• Collecting and analysing relevant data required to carry out specific reporting
• Interpretation and implementation of internal and external regulatory requirements
• Requirement specification and testing of solutions
• Leading the work on procurement and implementation of various types of systems
• Project management and staffing of agile roles according to SAFe