At the end of each month, the SAFE Regulatory Radar highlights a selection of important news and developments on financial regulation at the national and EU level.
Sustainable finance: ESG rating regulation, deforestation-free product provisions, and climate-related reports
On 19 November 2024, the Council of the EU adopted a new Regulation on ESG rating activities based on the agreement reached with the European Parliament. This regulation is designed to govern the issuance, distribution, and, where relevant, publication of ESG ratings without being intended to regulate their use. It aims to strengthen the investors’ confidence in sustainable financial products, while enhancing the reliability of ESG ratings and preventing potential conflicts of interest based on a principle of separation of business and activities.
In essence, the regulation requires the authorization and supervision of ESG rating providers established in the EU by the European Securities and Markets Authority (“ESMA”). The authorization process laid down focuses among other things on transparency requirements. The providers of ESG ratings established outside the EU but operating therein are now under the obligation to either obtain an endorsement of the ratings by authorized ESG rating providers, a recognition based on a quantitative criterion or be included in the EU registry of ESG rating providers based on an equivalent provision.
SAFE is actively involved assisting national competing authorities to monitor and implement ESG-related legislation within the context of the ESG Uptake Project to contribute to the achievement of sustainability goals at the national and European levels.
On 14 November 2024, the European Parliament approved the European Commission’s proposal of 2 October 2024 to amend the Regulation on Deforestation-free Products. The amendment specifically addresses the date of application of provisions imposing obligations on operators, traders, third countries, and Member States. On 20 November 2024, the Council of the EU reaffirmed its support for the proposal, which aims to provide stakeholders with additional time to prepare for the due diligence requirements. These obligations are designed to ensure that certain commodities and products sold or exported from the EU are deforestation-free. The approved amendment responds to concerns raised within the EU and by international partners about the readiness of stakeholders to comply with the Regulation. It extends the timeline for operators and traders to adapt to the new requirements, thereby minimizing the financial and operational impact on businesses while upholding the Regulation’s environmental objectives. Importantly, the amendment does not alter the substantive provisions of the Regulation but instead provides additional time for compliance. This decision by the co-legislators reflects the broader challenges of implementing the EU's green agenda, balancing environmental priorities with practical considerations for businesses and international trade.
On 19 November 2024, the European Supervisory Authorities (“ESAs”) together with the European Central Bank (“ECB”) published their Fit-for-55 climate scenario analysis. The report assesses the impact on the EU banking, investment fund, occupational pension fund, and insurance sectors of three transition scenarios incorporating the implementation of the Fit-for-55 package, as well as the potential for contagion and amplification effects across the financial system. Under the scenarios examined, the report concludes that transition risks alone are unlikely to threaten financial stability.
On 30 October 2024, the ESAs published a Joint Committee Report on Principal Adverse Impact disclosures under the Sustainable Finance Disclosure Regulation. The Regulation introduces sustainability disclosure requirements for financial market participants with more than 500 employees and financial advisors to communicate sustainability information to investors. Notably, they are required to publish a Principal Adverse Impact (“PAI”) statement, namely the potential negative effect on sustainability, and describe it in pre-contractual information. The report assessed both entity- and product-level Principal Adverse Impact (“PAI”) disclosures. The findings show that financial institutions have improved the accessibility of their PAI disclosures, and ESMA formulates recommendations for national competent authorities and the European Commission.
Capital Markets Union: Reform of EMIR and ELTIFs and the Proposal for the shortening of the settlement cycle
On 19 November 2024, the Council of the EU adopted the Review of the European Market Infrastructure (EMIR) Regulation and the Review of the European Market Infrastructure (EMID) Directive based on an agreement with the European Parliament. The rules adopted focus on the regulation of clearing services in the EU and aim at their improvement by streamlining and shortening procedures, improving consistency between rules, and strengthening the supervision of central counterparties (CCPs). The objective of such improvements is to make the EU clearing landscape more attractive and resilient, with the goal of preserving the EU’s financial stability.
This reform positively contributes to the Capital Markets Union insofar as the new rules will reduce excessive reliance on CCPs in non-EU countries that are of substantial systemic importance based on indicators such as the size of credit and liquidity exposures as defined in Article 25(2c) of EMIR and ESMA’s Methodology. To do so, the reform requires all relevant market participants to hold active accounts at EU CCPs and clear a representative portion of certain systemic derivative contracts within the single market.
On 25 October 2024, the European Commission finalized its Reform of the rules governing European Long-Term Investment Funds (“ELTIFs”), which are EU funds that enable investors to invest in tangible assets, companies, and long-term projects. The objective of the reform, which is part of the 2021 CMU Action Plan, is to enhance the accessibility and attractiveness of the ELTIFs for investors, removing hurdles for ELTIFs to be marketed. Additionally, it allows retail investors to access asset classes, projects, and investment strategies previously reserved primarily for highly sophisticated institutional investors and strengthens investor protection safeguards.
On 18 November 2024, ESMA published its Proposal to shorten the settlement cycle in the EU, moving to T+1 by October 2027. The report published assesses the appropriateness of shortening the settlement cycle and the potential impact of such shortening on Central Securities Depositories, trading venues and other market participants, as well as the costs and benefits of shortening the settlement cycle. ESMA concludes that a move to T+1 by October 2027 would increase the efficiency and the resilience of post-trade processes and that it would contribute to market integration and the Savings and Investment Union objectives, but advocates for specific governance to be put in place to tackle the complexity of the trading and post-trading environment in the EU capital markets.
Restrictive measures: Guidelines on internal policies, procedures and controls to ensure the implementation of Union and national restrictive measures
On 14 November 2024, the EBA issued two sets of Guidelines on internal policies, procedures, and controls to ensure the implementation of Union and national restrictive measures. On the one hand, the weaknesses that are observed in these regards expose financial institutions to legal and reputational risks and, on the other hand, undermine the effectiveness of the restrictive measures themselves, as they may lead to their circumvention and, in so doing, affect the stability and integrity of the EU’s financial system.
The guidelines aim at addressing the challenges deriving from the fact that, while restrictive measures are set at the EU level, there are significant differences in the expectations of competent authorities as regards the compliance on behalf of financial institutions. This entails several difficulties for financial institutions in the adoption of an effective approach, resulting in many inefficiencies, legal risks and costumer detriment.
The first set of guidelines concerns all institutions within the EBA’s supervisory remit, whereas the second set of guidelines focuses on payment service providers and crypto-asset service providers and specifies the action required to comply with restrictive measures when performing transfers of funds or crypto-assets.
Updates:
- On 14 November 2024, the ECB repealed and amended (see also here) the Guidelines presented in August’s Regulatory Radar.
- On 12 November 2024, the EBA released a Methodological Note, the Templates and a Template Guidance in preparation for its 2025 EU-wide stress test, which will formally start in January 2025, with the results scheduled for publications in August 2025.
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Pietro Chiarelli is Financial Policy Analyst at the SAFE Policy Center.
