E.U. pitches new measures on ESG investing

The European Union proposed new rules for sustainable finance on Wednesday that would for the first time require publicly-listed and large private companies to report standardized information on their environmental and social impacts.

The proposal is ultimately meant to "improve the flow of money" towards real sustainable finance, known as ESG investing for its basis in environmental, social and governance factors, according to the European Commission. It also would make it harder for companies to "greenwash" themselves by exaggerating their benefits to a new and greener economy.

The new sustainability reporting standards would apply to almost 50,000 businesses — more than quadruple the 11,000 companies that are subject to the E.U.'s current financial reporting requirements.

"By enabling investors to re-orient investments towards more sustainable technologies and businesses, today's measures will be instrumental in making Europe climate-neutral by 2050," the commission said. "They will make the E.U. a global leader in setting standards for sustainable finance."

Included in the companies that would be subject to the new financial reporting rules are large banks and other financial institutions with E.U.-based subsidiaries.

That would help to clarify which economic activities are most helpful in accomplishing the E.U.'s environmental objectives, the commission said, perhaps most notably its goals of accomplishing net-zero carbon emissions by mid-century and of better protecting nature and biodiversity.

Climate taxonomy

Other important parts of the proposal are the use of common terms — an E.U. taxonomy — for companies and investors to use and a set of rules to improve the corporate flow of sustainability information.

The commission said it hopes to elevate sustainability reporting "on a par" with financial reporting. Among the top requirements would be reporting on topics such as climate impacts, flooding risks, and fair treatment of employees.

The commission also proposed new terms for fiduciary duties, investment and insurance advice to require that asset managers and other financial firms include sustainability in their products and procedures used with clients.

“Europe was an early leader in reforming the financial system to support investments for climate change," said Valid Dombrovskis, a commission member from Latvia who oversees work on economics, trade and social rights.

"Today, we are taking a leap forward with the first-ever climate taxonomy which will help companies and investors to know whether their investments and activities are really green."

Dombrovskis said the new European standards also "will build on and contribute to international initiatives.”

The proposal goes next to the European Parliament and European Council to negotiate a final legislative text this year. Many of the new reporting standards may not be applied before the end of 2022, meaning the first time they likely would be published would be in 2024 for the 2023 financial year.