EUROPEAN COMMISSION Strasbourg, 6.7.2021 COM(2021) 390 final COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS EMPTY Strategy for Financing the Transition to a Sustainable Economy







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Introduction – Enhancing the EU sustainable finance framework Climate change and environmental degradation are defining global challenges of our time. Countries across the world recognise the urgent need to address these challenges, as demonstrated by their support for the Paris Agreement and the UN’s 2030 Agenda for Sustainable Development, and are setting ambitious targets. Based on the European Green Deal, the EU has made a number of ambitious commitments, in particular to become the first climate-neutral continent by 2050 and to reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels. The EU also aims to strengthen its resilience to climate change, to reverse biodiversity loss and the broader degradation of the environment and to leave nobody behind in the process. To reach these targets, the alignment of all sources of finance – public and private, national and multilateral – is required. The EU needs to cooperate globally and work with low- and middle-income countries in their transition. The EU sustainable finance framework will play a key role in meeting these targets and supporting a sustainable recovery from the COVID pandemic. Europe will need an estimated EUR 350 billion in additional investment per year over this decade to meet its 2030 emissions-reduction target in energy systems alone, alongside the EUR 130 billion it will need for other environmental goals. Investment in unsustainable activities and assets are increasingly likely to become stranded, as climate and environmental challenges become ever more material. The insufficient integration of these risks hampers reallocation of resources and risks leading to disruptive readjustments in the future, with implications for financial stability. Accordingly, environmental regulation must be complemented by a sustainable finance framework which channels finance to investment that reduces exposure to these climate and environmental risks. The framework for sustainable finance can make it easier for public authorities to raise sustainable capital. The EU is already taking significant steps in this regard. Under the 2021-2027 Multiannual Financial Framework (MFF) and Next-Generation-EU (NGEU), the Union aims to spend up to EUR 605 billion on projects addressing the climate crisis and EUR 100 billion in projects supporting biodiversity. Of the EUR 750 billion allocated for Next-Generation-EU, 30% will be raised through issuance of NGEU green bonds. As the ‘EU climate bank’, the European Investment Bank Group has also taken important steps to support the transition. As the scale of investment required is well beyond the capacity of the public sector, the main objective of the sustainable finance framework is to channel private financial flows into relevant economic activities. Private interest in sustainable investment has grown considerably in recent years but requires a framework for sustainable finance which is clear, consistent and robust. The EU is putting that framework in place. The sustainable finance framework and the Capital Markets Union reinforce each other, creating more opportunities for businesses and investors. Well-integrated and efficient capital markets should act as a catalyst for effective mobilisation and allocation of capital towards sustainable investments. In turn, the momentum of the sustainable finance policy agenda boosts the importance and urgency of the efforts to build a truly single and sustainable market for capital in the European Union. In 2018, the Commission adopted its first action plan on financing sustainable growth. Based on that plan, the EU has put in place the three building blocks for a sustainable financial framework . These building blocks are: 1) a classification system, or ‘taxonomy’, of sustainable activities, 2) a disclosure framework for non-financial and financial companies, and 3) investment tools, including benchmarks, standards and labels . The first building block is the EU Taxonomy. The Taxonomy Regulation aims to provide a robust, science-based classification system, allowing non-financial and financial companies to share a common definition of sustainability and thereby providing protection against greenwashing. The second building block is a mandatory disclosure regime for both non-financial and financial companies, providing investors with information to make informed sustainable investment decisions. Disclosure requirements include the impact of a company’s activities on the environment and society, as well as the business and financial risks faced by a company due to its sustainability exposures (the ‘double materiality’ concept). In this context, the Commission has today adopted a delegated act under the Taxonomy Regulation specifying the information to be disclosed by financial and non-financial undertakings concerning their environmental performance based on the EU Taxonomy. EU sustainability disclosure regime for financial and non-financial companies Instrument Corporate Sustainability Reporting Directive (CSRD) proposal Sustainable Finance Disclosure Regulation (SFDR) Taxonomy Regulation Scope All EU large companies and all listed companies (except listed micro enterprises) Financial market participants offering investment products, and financial advisers Financial market participants; all companies subject to CSRD Disclosure Report on the basis of formal reporting standards and subject to external audit Entity and product level disclosure on sustainability risks and principal adverse impacts Turnover, capital and operating expenditures in the reporting year from products or activities associated with Taxonomy Status Under negotiation; expected to apply from 2023 Applies from 10 March 2021 Applies from January 2022 To complement these disclosure requirements, sustainability preferences must be included in investment and insurance advice . The third building block is a set of investment tools, including benchmarks, standards and labels. These make it easier for financial market participants to align their investment strategies with the EU’s climate and environmental goals. They provide greater transparency to market participants. These are the objectives of both the EU Climate Transition Benchmarks and the EU Paris-aligned Benchmarks, created by the EU Climate Benchmarks Regulation. Today, the Commission is adopting a legislative proposal for a standard on European green bonds. This proposal will create a high-quality voluntary standard, available to all issuers to help attract sustainable investments. Furthermore, the extension of the EU Ecolabel to financial products, will provide retail investors with a credible, reliable and widely recognised label for retail financial products. Within a few years, major progress has been made in laying the foundations for the sustainable finance framework. The three building blocks are underway, but work remains to be done. The Commission is committed to completing the implementation of its ambitious 2018 action plan. However, since 2018, our understanding of what is needed to meet the sustainability goals has evolved, and the global context has changed. For these reasons, a new phase of the EU’s sustainable finance strategy is required. This strategy identifies four main areas where additional actions are needed for the financial system to fully support the transition of the economy towards sustainability. To inform this strategy, the Commission requested advice from the Platform on Sustainable Finance and ran an extensive stakeholder consultation in 2020 . This strategy also complements other European Green Deal initiatives, such as the Fit for 55 Package. I.Financing the transition of the real economy towards sustainability The transition towards the EU’s sustainability goals requires unprecedented efforts to mitigate and adapt to climate change, rebuild natural capital and strengthen resilience and wider social capital, all as part of a sustainable recovery from the COVID-19 crisis. The transition pathways of economic actors will vary considerably, with different starting points and different business strategies, but all pathways should ultimately be consistent with the EU’s sustainability goals.

EU efforts have predominantly focused on supporting investment flows towards economic activities that are already environmentally sustainable and towards plans to make them environmentally sustainable. A more supportive framework is needed to address the challenge of financing interim steps in the urgent transition of activities towards the EU’s climate neutrality and environmental objectives. The Commission has requested the advice of the Platform on Sustainable Finance on options that would encourage and recognise investments in economic activities for the transition towards sustainability . Recognising transition efforts While companies, issuers and investors can use the EU Taxonomy to green their activities and portfolios, the current framework could be developed to better recognise investments for intermediary steps on the pathway towards sustainability. Such investments may reduce harmful climate and environmental impacts, if they do not lead to lock-in of carbon-intensive technologies. As a first step, the Commission will consider proposing legislation to recognise and support the financing of certain economic activities, primarily in the energy sector, including gas, that contribute to reducing greenhouse gas emissions in a way that supports the transition towards climate neutrality throughout the current decade, as announced in the Commission’s Communication of April 2021. Furthermore, the Commission will consider options for an extension of the Taxonomy framework beyond environmentally sustainable activities to possibly recognise activities with an intermediate level of environmental performance. This could help to boost transparency and mobilise finance for economic activities that are on a credible pathway towards sustainability, while taking into account social aspects. By the end of 2021, the Commission will publish a report describing the provisions required to cover economic activities that do not have a significant impact on environmental sustainability and economic activities that significantly harm environmental sustainability . Including additional sustainable activities in the EU Taxonomy As announced in the Commission’s Communication published in April 2021, the Commission will adopt a complementary EU Taxonomy Climate Delegated Act covering activities not yet covered in the first EU Taxonomy Climate Delegated Act, such as agriculture and certain energy sectors, in line with the requirements of the Taxonomy Regulation. The Delegated Act will also cover nuclear energy activities, subject to and consistent with the specific expert review process that the Commission set out for this purpose . The Commission will adopt this complementary Delegated Act as soon as possible after the end of the specific review process in summer 2021. This complementary Delegated Act will also cover natural gas and related technologies as transitional activity in as far as they fall within the limits of Article 10(2) of the EU Taxonomy Regulation. The merits of a sunset clause for transitional activities will be considered in this context. Furthermore, the Commission will adopt technical screening criteria for the remaining four environmental objectives under the Taxonomy Regulation: water, circular economy, pollution prevention and biodiversity. The Commission will set out criteria for these objectives in a delegated act as foreseen by the Taxonomy Regulation, to be adopted in the first half of 2022, which will then apply from 2023. This will facilitate environmentally sustainable investments beyond climate. Extending the framework of sustainable finance standards and labels Standards and labels can help channel finance to companies, issuers and investors as they transition towards more sustainable activities and business models. They can also help investors by creating a transparent, credible framework to prevent greenwashing. To facilitate additional capital flows to interim transition efforts, the Commission will work on other bond labels, such as transition or sustainability-linked bond labels. Looking ahead, a more general framework for labels for financial instruments could help bring clarity, transparency and coherence to sustainable finance markets. This framework would enable and cater for future market innovation, while ensuring a minimum level of transparency and credibility with regards to sustainability factors of labels developed by the market. Beyond financial instruments, the Commission will consider labels for Environmental, Social and Governance (ESG) benchmarks and minimum sustainability criteria for financial products that promote environmental or social characteristics. Finally, adjustments to the Prospectus Regulation may be considered to create minimum requirements for the comparability, transparency and harmonisation of information available for all ESG securities. Action 1: To develop a more comprehensive framework and help the financing of intermediary steps towards sustainability, the Commission will: a)consider proposing legislation to support the financing of certain economic activities, mainly in the energy sector, that help to reduce greenhouse gas emissions; b)consider options for extending the EU Taxonomy framework to possibly recognise economic activities performing at an intermediate level; c)adopt a Complementary EU Taxonomy Climate Delegated Act covering new sectors including agriculture and certain energy activities; d)adopt a delegated act under the EU Taxonomy covering the remaining four environmental goals, i.e. water, biodiversity, pollution prevention and circular economy by Q2-2022; and e)consider a general framework for labels for financial instruments, work on other bond labels such as transition or sustainability-link bonds, an ESG Benchmark label, minimum sustainability criteria for financial products that promote environmental or social characteristics and introduce targeted prospectus disclosures. II.Towards a more inclusive sustainable finance framework Empowering retail investors and SMEs to access sustainable finance opportunities Citizens, as retail investors or consumers, and small and medium-sized enterprises (SMEs) are key for the sustainability transition. Many sustainable projects will be small and developed at local level – yet essential to supporting the green recovery. The Capital Markets Union and the sustainable finance framework together will aim to provide SMEs with more financing opportunities and encourage greater retail investor participation in capital markets.

Individuals and households can play an important role in transforming the economy by accessing sustainable finance. For example, green loans can help households and SMEs improve the energy performance of their buildings or switch to zero emission vehicles. To encourage green retail lending, the Commission will ask the European Banking Authority (EBA) for an opinion on the definition and possible supporting tools for green retail loans and green mortgages. The Commission will also explore ways to support the uptake of energy efficient mortgages in the framework of the Mortgage Credit Directive review. Financial advisors are the main point of contact for retail investors. They need to be qualified to support the uptake of sustainable finance. The Commission will encourage greater retail investor engagement by seeking improvements in the level of sustainability expertise of financial advisors, subject to further assessment. Moreover, the Commission, together with the OECD and its International Network on Financial Education, are working to improve citizens’ financial literacy. They will publish joint financial competence frameworks for adults and young people reflecting the skills and knowledge individuals need to support their financial well-being and to further access sustainable finance. The EU economy includes 23 million SMEs, which should benefit from greater access to sustainability advisory services based on their specific needs. The COVID-19 crisis has made it more challenging for SMEs to attract financing they need for their transition efforts. SMEs often lack the capabilities and awareness to seize the opportunities offered by sustainable finance tools. The Commission stands ready to support Member States in their efforts to provide capacity building and technical advice on how SMEs can voluntarily report on sustainability risks and impacts . To that end, and in line with the proposed CSRD, the European Financial Reporting Advisory Group (EFRAG) will prepare a simplified voluntary sustainability reporting standard that will provide SMEs with a proportionate tool. In addition, the Invest EU Programme will provide de-risking mechanisms while the SME pillar of the Single Market Programme will provide advisory services for SMEs through the Enterprise Europe Network and the Joint Cluster Initiative. Leveraging the opportunities digital technologies offer for sustainable finance Digital technologies can provide essential solutions for citizens, investors and SMEs to carry out their transition to sustainability. The Commission will enable and encourage innovative solutions to help SMEs use digital sustainable finance tools and to support retail investor understanding of the sustainability impact of financial products. Technological innovation, such as artificial intelligence, blockchain, big data, and the Internet of things, has a significant role to play in sustainable finance. Further EU initiatives, such as including sustainability-related information in the European Single Access Point (ESAP) and the Open Finance Framework, will help to unleash this potential. While digital technologies are important enablers in the transition, there are concerns about the environmental impact and increasing energy needs of data centres and distributed ledger technologies, notably for crypto-assets. The Commission will assess the sustainability impact of digital finance technologies. The EU should take the lead in making these infrastructures climate neutral and energy efficient by 2030. The EU Taxonomy Climate Delegated Act already establishes the technical screening criteria for data centres and digital solutions that substantially contribute to the EU Taxonomy objectives and should be expanded to include more activities for developing sustainable digital solutions and using sustainable crypto-assets. Insurance: offering greater protection from climate and environmental risks By increasing insurance coverage, the financial system can better protect the economy and society against certain climate-related and natural disaster risks. A small increase in insurance coverage can significantly reduce the economic cost of climate-related disasters for taxpayers and governments. The recently adopted Climate Adaptation strategy will create the enabling conditions to support society’s resilience to climate change and reduce the risks. A natural disaster insurance dashboard from the European Insurance and Occupational Pensions Authority (EIOPA) will indicate potential insurance coverage gaps in Member States. In addition, the Commission will initiate a Climate Resilience Dialogue between insurers, re-insurers, public authorities and other stakeholders to exchange best practices and identify ways to address the climate protection gap, either through recommendations or through voluntary commitments. Supporting credible social investments The recovery from the pandemic has highlighted the need for a just transition that supports workers and their communities affected by the transitioning of economic activities. The steep increase in social bond issuance shows that investors are increasingly looking for investment opportunities with positive social outcomes and promoting human rights. This trend encourages financial institutions to intensify their engagement with companies to help them integrate human rights and social factors in their strategies and activities. Sustainable finance disclosure requirements for financial market participants already include certain social factors, but further steps are needed. Before December 2022, the Commission will engage with the European Supervisory Authorities to review the regulatory technical standards under the SFDR, clarifying indicators for both climate and environment-related principal adverse impacts and principal adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. Furthermore, by the end of 2021, the Commission will publish a report on the provisions required for a social taxonomy, as required by the Taxonomy Regulation . In addition, the Commission will put forward a proposal on Sustainable Corporate Governance to ensure companies manage sustainability risks and benefit from opportunities derived from the path to sustainability. Green budgeting and risk-sharing mechanisms While public funds alone cannot finance all the investment needs, they have a major role to play, alongside private funding. The Commission is further strengthening climate and biodiversity mainstreaming in the EU budget. The Commission is already using green budgeting tools in the annual EU budget cycle. In the context of the implementation of the 2021-2027 Multiannual Financial Framework and the related inter-institutional agreement with its commitments on climate and biodiversity spending, this work will be further strengthened. The Commission is committed to producing updated and strengthened tracking methodologies on both climate and biodiversity. Those tracking methodologies will be key to monitor that climate and biodiversity spending under the 2021-2027 Multiannual Financial Framework align with the EU’s ambition. The Commission is also working closely with Member States to increase the use of green budgeting tools. The Commission has also developed a green budgeting reference framework and conducts annual surveys on existing practices in green budgeting in the EU to support the many Member States who want to redirect their national budget to green priorities. Analytical work, technical support and training as well as an annual conference promote a mutual learning process to ensure that budgetary policies and spending are in line with environmental commitments. Risk-sharing between public and private investors can effectively address market failures that hinder the financing of sustainable infrastructure and innovation driven transition. The Sustainable Europe Investment Plan, the investment pillar of the European Green Deal, aims to mobilise at least EUR 1 trillion in sustainable investments over the next decade from private and public actors. The InvestEU programme will provide risk-taking capacity and support for related advisory initiatives to the EIB Group, national promotional banks and other financial institutions. The Commission will organise an inaugural annual Sustainable Investment Summit ahead of COP 26 to take stock of progress across EU initiatives included in the Sustainable Europe Investment Plan. Action 2: To improve the inclusiveness of sustainable finance, the Commission will: a)ask the EBA for an opinion on the definition of and support for green loans and mortgages, explore options to facilitate their uptake by 2022, and increase access of citizens and SMEs to sustainable finance advisory services;

b)integrate sustainable finance related data in the data spaces under the European Data Strategy and reflect, together with the Digital Finance Platform, on possible further actions to enable and encourage innovative solutions using digital technologies to support SMEs and retail investors; and c)identify insurance protection gaps through EIOPA’s natural disaster dashboard and initiate a Climate Resilience Dialogue with all relevant stakeholders (2022); d)publish a report on a social taxonomy by the end of 2021; and e)strengthen tracking methodologies for climate and biodiversity spending, support Member States who want to redirect their national budget to green priorities and organise an inaugural annual Sustainable Investment Summit ahead of COP 26. III.Improving the financial sector’s resilience and contribution to sustainability: the double materiality perspective To align with the European Green Deal, the financial sector itself will need to be more resilient to the risks posed by climate change and environmental degradation and also improve its contribution to sustainability. This requires a comprehensive approach which consists of the systematic integration of both financially material sustainability risks (outside-in) and sustainability impacts (inside-out) in financial decision-making processes. It is crucial that both angles of the materiality concept are duly integrated for the financial sector to contribute pro-actively and fully to the success of the European Green Deal. Enhancing economic and financial resilience to sustainability risks Sustainability risks are already material, and will have adverse impacts on financial stability and the financing of the real economy. The physical impact of climate change and the loss of biodiversity create risks that can be systemic and may not be visible at the individual asset level. Risks might also arise from a disorderly and sudden reaction to the transition. It is therefore vital to understand the nature and degree of these exposures and how they interact and evolve over time. Complementary steps are needed to ensure a consistent integration of sustainability factors in risk assessment and management in the financial sector. Reflecting sustainability risks in financial reporting standards and accounting The Commission strongly supports international work on integrating sustainability considerations into financial reporting and accounting and will seek the highest level of ambition. The Commission will work with the European Financial Reporting Advisory Group (EFRAG), the European Securities and Markets Authority (ESMA) and the International Accounting Standards Board (IASB) to assess whether international financial reporting standards (IFRS) appropriately integrate sustainability risks. As financial reporting standards and practices determine the value of investments, they are a key element for embedding sustainability risks in financial market decision-making. In particular, it should be assessed how to recognise and report relevant climate and environmental risks in financial statements adequately and on a timely basis. To encourage the development of standards for assessing natural capital in the EU and globally, the Commission is also intensifying its engagement with industry on biodiversity and natural capital accounting. Improving transparency of credit ratings and rating outlooks Credit rating agencies play an important role in the financial system by assessing the credit risk of financial and non-financial issuers. Stakeholders continue to express concerns around the lack of transparency on how credit rating agencies incorporate sustainability factors in their methodologies, in light of the wide use of credit ratings. Subject to further assessment of the effectiveness of the existing measures by ESMA, the Commission will take action to improve transparency and ensure the inclusion of relevant ESG factors in credit ratings and credit outlooks, while ensuring methodological transparency. Identifying and managing sustainability risks by banks and insurers The ability of banks and insurance companies to identify and manage sustainability risks and absorb financial losses arising from them is key for financial stability and the resilience of the real economy during the transition. While financial sector entities and supervisors are making efforts to capture climate and environmental factors in risk management systems and prudential capital requirements, progress remains insufficient. -The Commission will propose amendments to the prudential framework for banks to ensure ESG factors are consistently included in the risk management systems and supervision. To achieve this, clear requirements will be set to identify, measure, manage and monitor sustainability risks in the risk management frameworks, including climate change stress testing for banks. To complement this and as part of the annual supervisory assessment, the role of supervisors in assessing such risks will be clarified and strengthened. Finally, the Commission will propose for the European Banking Authority to bring forward its ongoing assessment of the prudential treatment of exposures related to assets or activities associated substantially with environmental and/or social objectives by two years to 2023. -The Commission will consistently integrate sustainability risks in the risk management systems and supervision of insurers. Amendments to the Solvency II Directive will be proposed, including climate change scenario analysis by insurers. Similar to the approach taken in the banking sector, EIOPA will assess the risk differentials between environmentally and/or socially sustainable and other exposures in insurance. Managing sustainability risks at system level Increasing the resilience of the financial system to shocks requires the identification, measurement and management of risks at the system level. The Commission will strengthen its cooperation with European supervisors and the European Central Bank (ECB) with the aim of capturing, monitoring and mitigating all systemic sustainability risks impacting long-term financial stability. To achieve this, work will be intensified to develop coherent and relevant methodologies and scenarios to quantify sustainability risks and to stress test the resilience of the financial system, covering relevant financial sectors. The Commission will mandate a targeted stress-testing of the financial system on the Fit-for-55 package. Financial institutions are increasingly exposed to the accelerating degradation of ecosystems and loss of biodiversity, the depletion of natural resources and the levels of pollution in our water, air and soils. To advance efforts in measuring the financial risks stemming from a significant loss of biodiversity and ecosystem degradation, the Commission will prepare a report on the measurement and presence of such risks in the EU. The Commission report will also look at approaches and methods to measure those risks and outline next steps in this area.

Finally, addressing and managing systemic risks requires appropriate tools for macro-prudential authorities. With the support of the European Supervisory Authorities (ESAs), the European Systemic Risk Board (ESRB) and the ECB, the Commission will consider whether macro-prudential tools are able to address climate change-related financial stability risks as part of an upcoming review of the banking macro-prudential framework. In the medium term, further work will be conducted on broadening the scope to non-banking sectors and to environmental risks based on advice by the European Supervisory Authorities, the ESRB and the ECB. Action 3: To enhance economic and financial resilience to sustainability risks, the Commission will: a)work with EFRAG, ESMA and the IASB on how financial reporting standards can best capture relevant sustainability risks; b)take action to ensure that relevant ESG risks are systematically captured in credit ratings and rating outlooks in a transparent manner, taking into account further assessment by ESMA (2023); c)propose amendments in the Capital Requirements Regulation and Capital Requirements Directive to ensure the consistent integration of sustainability risks in risk management systems of banks, including climate change stress tests by banks (2021); d)propose amendments in the Solvency II Directive to consistently integrate sustainability risks in risk management of insurers, including climate change scenario analysis by insurers (2021); and e)strengthen long-term financial stability through closer cooperation on financial stability risk assessment, regular stress tests, an assessment of macro-prudential tools and a study dedicated to risks stemming from environmental degradation and biodiversity loss. Accelerating the contribution of the financial sector to transition efforts Beyond the management of sustainability risks by financial institutions, the success of the European Green Deal depends on the contribution of all economic stakeholders and on their incentives to meet our targets. To that end, financial institutions must translate EU sustainability goals into their long-term financing strategies and decision-making processes. This includes better measuring, monitoring and disclosing progress on a regular basis. Improving science-based target setting, disclosure and monitoring of the financial sector’s commitments Financial institutions should disclose their own sustainability transition and decarbonisation plans, including intermediate and long-term targets and how they plan to reduce their environmental footprint. Greater transparency on targets, indicators, definitions and methodologies will be key to monitor the effectiveness of actions over time. The CSRD proposal will require large EU companies and listed companies including banks, insurers and investors to disclose sustainability targets and progress towards achieving them. In addition, and building on the regulatory technical standard under the SFDR, the Commission will strengthen the disclosure and effectiveness of decarbonisation action by financial market participants for all investment products. In this regard, voluntary pledges by financial institutions globally to adopt strategic science-based climate and sustainability targets are also commendable as a first step. Pending possible further policy action in this area, the Commission will examine to what extent more guidance could ensure that such voluntary pledges are credible and will monitor progress over time across the EU. At this stage, financial institutions could use the EU Taxonomy and other sustainable finance tools to progress towards achieving their plans at entity and portfolio level. Clarifying the fiduciary duties and stewardship rules of investors to reflect the financial sector’s contribution to Green Deal targets Aligning financial flows with the European Green Deal objectives requires further consideration of sustainability impacts in the strategies and investment decision-making processes of investors. On 21 April 2021, the Commission published six amending delegated acts, which require financial firms, such as advisers, asset managers and insurers, to include financially material sustainability risks in their procedures and to consider the sustainability preferences of their clients. This will need to be complemented by further action for the 125 000 pension funds in the EU managing collective schemes on behalf of around 75 million Europeans. To enhance their contribution to the Green Deal targets, it is critical that the fiduciary duties of investors and pension funds towards members and beneficiaries also reflect the inside-out ESG risks of investments as part of investment decision-making processes. -The Commission will ask EIOPA to assess the potential need to broaden the concept of the ‘long-term best interest of members and beneficiaries’ and introduce the obligation to consider sustainability impacts in the pension investment framework. The aim would be to ensure that the framework better reflects members and beneficiaries’ sustainability preferences and broader societal and environmental goals. In collaboration with the European Supervisory Authorities, the Commission will consider and assess further measures to enable all relevant financial market participants and advisers to consider positive and negative sustainability impacts of their investment decisions, and of the products they advise on a systematic basis. -The Commission will review relevant frameworks relating to investors’ stewardship and engagement activities. In particular, the Commission will explore how the Shareholder Rights Directive II may better reflect EU sustainability goals and align with global best practices in stewardship guidelines. Improving the availability, integrity and transparency of ESG market research and ratings To carry out their transition efforts, financial institutions will need a wide array of information to identify sustainability risks, opportunities and impacts of their investee companies and clients. To that end, the CSRD proposal will require large, listed EU companies to disclose meaningful, comparable and forward-looking sustainability data across the finance value chain . In addition, the upcoming proposal for a European Single Access Point will create an EU-wide mechanism offering easily accessible, comparable and digitally usable databases on the public reporting requirements of companies, including sustainability information. Subject to a public consultation and an impact assessment, the Commission will take action to improve the reliability, comparability and transparency of ESG ratings. ESG ratings have an increasingly important impact on the operation of capital markets and on investor confidence in sustainable products. Such an action will build on the Commission’s study published in January 2021, identifying a lack of transparency in the operations of ESG ratings providers, the low level of comparability between ESG ratings and potential conflicts of interests. The increasing demand for sustainable investments also puts the focus on the need for unbiased and reliable ESG research, based on transparent and comparable methodologies. Action 4: To increase the contribution of the financial sector to sustainability, the Commission will:

a)improve financial institutions’ disclosures of sustainability targets and transition planning, examine to what extent more guidance could ensure that voluntary pledges are credible and monitor progress; b)ask EIOPA to assess the need to review the fiduciary duties of pension funds and investors to reflect sustainability impacts as part of investment decision making processes, including stewardship and engagement activities by 2022; and c)take action to improve the reliability and comparability of ESG ratings and further assess certain aspects of ESG research, to decide on whether an intervention is necessary. Addressing greenwashing The EU has taken important steps to address greenwashing in the financial market. Greenwashing attempts can generate reputational risks for the actors involved and trigger a loss of trust in sustainable finance products and the financial system. To prevent greenwashing, the EU has introduced disclosure requirements for companies and investors and created tools to increase transparency and help end-investors identify credible investment opportunities . Yet, the effectiveness of sustainable finance policies also depends on an adequate level of enforcement across the EU. Supervisors have a key role in monitoring compliance with sustainable finance regulation, and making full use of their legal mandates and powers to ensure that investors and consumers are protected against unsubstantiated sustainability claims. With the support of the European Supervisory Authorities, the Commission will assess whether supervisory powers, capabilities and obligations are fit for purpose. Based on this assessment and the monitoring of greenwashing risks by the European Supervisory Authorities, the Commission will consider steps to ensure a sufficient, consistent level of enforcement and supervision to address greenwashing. Monitoring an orderly transition of the EU financial system Achieving EU climate objectives will require collaborative action among Member States, financial supervisors and relevant public authorities to monitor progress in the transition. The Commission, in collaboration with the Platform on Sustainable Finance, will develop a robust monitoring framework to measure capital flows to sustainable investments. The Commission will assist Member States in assessing the investment gap and measuring the progress made by financial sectors to achieve our climate and environmental goals . European supervisors can play an important role to help with the consistent integration of the double materiality perspective across the financial system. The Commission will strengthen the cooperation among all relevant public authorities, including supervisors, to help define intermediate targets for the financial sector, better understand if progress is sufficient, and thus pave the way for taking a more collaborative policy action by all relevant public authorities. Finally, the Commission will establish a Sustainable Finance Research Forum to strengthen the role of science and encourage knowledge sharing on sustainable finance between academia and the industry. This forum would be tasked with increasing awareness on the use of sustainable finance research and fostering knowledge exchange between researchers and the financial community. Action 5: To monitor an orderly transition and ensure the integrity of the EU financial system, the Commission will: a)monitor greenwashing risks, and assess and review the current supervisory and enforcement toolkit available to Competent Authorities, to ensure that supervisory powers, capabilities and obligations are fit for purpose, with the support of the European Supervisory Authorities; b)develop a robust monitoring framework to measure capital flows and assist Member States in assessing the investment gap and measuring the progress made by their financial sectors by 2023; c)strengthen cooperation among all relevant public authorities, including Member States, the ECB, the ESRB, the European Supervisory Authorities and the European Environment Agency, to work towards a common approach to monitor an orderly transition and ensure the double materiality perspective is consistently integrated across the EU financial system (by 2022); and d)establish a Sustainable Finance Research Forum to foster knowledge exchange between researchers and the financial community. IV.Fostering global ambition Global challenges call for global action. However, different jurisdictions have varying starting points, levels of ambition and objectives. International forums and networks are increasingly coordinating sustainable finance initiatives to fully harness the global potential of sustainable finance . Building on its domestic achievements, the EU has established itself as a leader in sustainable finance internationally and is actively contributing to the global effort. This leadership can be a source of inspiration for other jurisdictions across the world and generate business opportunities for the EU financial sector globally. EU actors are the largest issuers of green bonds and have emerged as major sustainable investors. Dynamic green markets help strengthen the international role of the euro and make the EU the major global hub for sustainable finance. The Commission sees the need for an ambitious and robust international sustainable finance architecture that embraces the concept of double materiality and supports EU partner countries. This architecture must encompass robust international governance, a solid rulebook and a monitoring framework. As a first step, the Commission suggests that the Financial Stability Board (FSB) expands its mandate to cover the contribution of the financial system to global climate and environmental objectives. The Commission invites all international partners to deepen cooperation on sustainable finance bilaterally and multilaterally, in particular to promote convergence of approaches and to provide the private sector with usable tools and metrics, such as taxonomies. Notably, as part of the G20 Sustainable Finance Working Group (SFWG) Roadmap, the Commission stresses the importance of working towards the alignment of financial flows with sustainability goals. Promoting an ambitious consensus in international forums