ESG Regulations Adopted by the European Union

1 November 2019
By Simon Witney (special counsel) and Andrew Burnett (trainee)

On 24 October 2019, the European Council adopted the Disclosure Regulation and Low Carbon Benchmark Regulation at first reading. This means both Regulations will be published in the Official Journal of the EU in the coming weeks: the Low Carbon Benchmark Regulation will apply the day after publication while the Disclosure Regulation will come into force 20 days after publication, but will only apply from 15 months following that date.

The Low Carbon Benchmark Regulation may have significant impacts in the longer-term, but does not require any immediate action from investment managers. Its aim is to create a single low-carbon benchmark providing for minimum standards and a common methodology. Currently, there are a number of divergent approaches to benchmark methodologies which do not provide clarity on whether an index is aligned to the Paris Climate Agreement or merely a benchmark that aims to lower the carbon footprint of a standard portfolio investment. The Council hopes this clarifying Regulation will resolve that lack of precision.

The Disclosure Regulation will be more significant for investment managers, although its application is also not immediate. The Regulation will require most managers to disclose how they have considered sustainability issues that materially affect the value of an investment, and also whether they have considered the investment’s societal impacts more broadly. As we have discussed in a previous blog post, the timeline of this Regulation has caused controversy.  Some have argued the “Level 2” rules which will provide necessary detail for compliance will probably not be finalised in time, not giving firms sufficient time to prepare.

Nevertheless, these concerns have evidently not detained the Council, and both Regulations now have a clear timeline for their entry into force.

Another key ESG‑related EU Regulation, the Taxonomy Regulation, which intends to harmonise sustainable investment language, has faced delays. The Council did not adopt the Regulation at first reading but instead published a compromise proposal, and the Regulation is now scheduled to come into force at the end of 2022. Like the “Level 2” rules, there are concerns that the delay of this Regulation will limit the effectiveness of the Disclosure Regulation.