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This briefing in our ESG series for Irish funds and fundmanagement companies focuses on the European Commission'sproposals to establish a classification system or"taxonomy" to identify whether and to what extent aneconomic activity can be considered to be sustainable.

With the aim of furthering sustainable finance and ESGintegration, the European Commission (the"Commission") introduced a package oflegislative measures in 2018 that includes three key Regulations:the Taxonomy Regulation, the Disclosures Regulation and the LowCarbon and Positive Impacts Benchmarks Regulation.

The aim of the Taxonomy Regulation is to establish an EU-wideclassification system or taxonomy for environmentally sustainableeconomic activities. This classification system is to be used toreduce fragmentation arising from market-based initiatives andnational practices and address practices of"greenwashing" so as to allow investors better compareESG products.

The Taxonomy Regulation was adopted by the Commission on 18 June2020 and entered into force on 12 July 2020 and builds on the workof the Technical Expert Group on Sustainable Finance(TEG) set up by the Commission to assist indeveloping the taxonomy and furthering other EU Action Planinitiatives. These EU-wide standards will form the basis foreconomic and regulatory measures and the eventual creation oflabels to enable capital markets to identify investmentopportunities that contribute to the EU's environmental policyobjectives.

The initial focus of the Taxonomy Regulation is on environmentalobjectives, with social objectives to be considered later.

At a high level, sustainable investment under the TaxonomyRegulation is an investment in an economic activity thatcontributes to an environmental objective as measured by keyresource efficiency indicators provided that such investments donot significantly harm any of those objectives and that theinvestee companies follow good governance practices.

For a product to be properly characterised as environmentallysustainable it should:

Contribute substantially to one of the defined environmentalobjectives;

The six environmental objectives are:

Each objective is explained further in the Taxonomy Regulationand linked to any existing EU law on that area. Further granularitywill be given in technical screening criteria, which will be builtup over time and are to be updated on a regular basis to reflectthe changing nature of the science and technology that underpinthem.

The Taxonomy Regulation also mandates the establishment of a"Platform on Sustainable Finance", which will includerepresentatives of various EU bodies (including the EuropeanEnvironment Agency and the European Supervisory Authorities),environmental experts, and accounting and reporting experts with abroad remit to advise the Commission on the technical screeningcriteria and on the need to update these based on a number ofcriteria, including developing trends and stakeholder requests.

The technical screening criteria, or "taxonomy", forthe first two environmental objectives climate changemitigation and climate change adaptation should beestablished by the end of 2020 in order to ensure its fullapplication by end of 2021. For the four other objectives, thetaxonomy should be established by the end of 2021 for applicationby the end of 2022.

The Taxonomy Regulation recognises that, while some activitiesmay bring a positive output toward the relevant objective, they maybe accompanied by a negative impact and so the taxonomy addressesthe need to measure the combined outcome and identify the minimumrequirements necessary to avoid a significant harm to otherobjectives.

The Taxonomy Regulation applies the principles while adopting aneutral stance in relation to different energy forms. The keyconsideration is whether they are low in greenhouse gas emissionsand the categorisation includes two sub-categories of"transitional" and "enabling" activities.

Transitional activities relate to activities for which there areno technologically and economically feasible low-carbonalternatives, but that support the transition to a climate-neutraleconomy in a manner that is consistent with a pathway to limit thetemperature increase to 1.5 degrees Celsius above pre-industriallevels, for example by phasing out greenhouse gas emissions.Enabling activities are those that enable other activities to makea substantial contribution to one or more of the objectives. Therewill be an obligation to disclose for each financial product theproportion invested in enabling and transitional activities.

One of the difficulties for those tasked with the newevaluations and disclosures is getting the relevant informationfrom the underlying investee companies. The Taxonomy Regulationseeks to assist access to that information by placing an obligationon undertakings that are subject to non-financial reportingrequirements to include details of how and to what extent theireconomic activities are associated with environmentally sustainableactivities and large companies will have to report on certainclimate-related KPIs.

The Taxonomy Regulation is mainly relevant to managers that makeavailable a product that has an express sustainability focus('ESG Products'), however, all managers need to takeaccount of it and managers that do not offer ESG Products will atleast need to make a negative disclosure to confirm that theirproduct is out of scope and does not adhere to the taxonomycriteria.

The Taxonomy Regulation incorporates certain concepts from theDisclosures Regulation and amends certain provisions of thatRegulation. It effectively builds on the three tier categorisationof products set out in the Disclosures Regulation:

For asset managers that promote ESG Products there will beadditional disclosure requirements imposed over and above thosealready set out in the Disclosures Regulation.

Article 9 products must make pre-contractual and periodicdisclosures that include information on the environmentalobjectives to which the product contributes and a description ofhow and to what extent the underlying investments qualify asenvironmentally sustainable and the proportion of investments whichare environmentally sustainable.

Article 8 products must make pre-contractual and periodicdisclosures relating to information on the environmentalcharacteristics that the product promotes, a description of how andto what extent the underlying investments qualify asenvironmentally sustainable and the proportion of investments thatare environmentally sustainable together with a prescribeddisclaimer.

All other products must set out a prescribed disclaimer in theirpre-contractual and periodic disclosures that the investments donot take account of the criteria set by the TaxonomyRegulation.

The Taxonomy Regulation also amends the Disclosure Regulation byinserting an obligation for the European Supervisory Authorities todevelop technical standards specifying the details of the "dono significant harm" principle expressed in the DisclosureRegulation. Draft technical standards are to be provided to theCommission by 30 December 2020.

The requirements of the Taxonomy Regulation will apply on astaggered basis. The requirements in relation to climate changeadaption and migration will apply from 1 January 2022 with theother environmental objectives to apply from 1 January 2023.

For more information on the impact of the EU's ESGinitiative on asset managers, see our overview briefing here.

This article contains a general summary of developments andis not a complete or definitive statement of the law. Specificlegal advice should be obtained where appropriate.

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ESG For Fund Managers: The EU Framework Regulation / The Taxonomy Regulation - Finance and Banking - European Union - Mondaq News Alerts

Pensions & Investments

Oil & Gas 360 Publishers Note: Nice article written by Hazel Bradford covering ESG investing and the U.S. and EU/U.K. differences and similarities. What is not covered is some specifics about the energy sector. Large power, oil, and renewable companies are right in the middle of the ESG investor, and availability of operating capital. BP as one example is morphing into a balanced energy company with increasing the renewable projects, while decreasing operations in traditional fossil fuels. We have articles and coverage of these stories on our production schedules.

Regulatory approaches to ESG investing by retirement funds are increasingly diverging between the U.S. and the European Union and U.K. and could affect fund returns at some point,Fitch Ratings said in a briefFriday.

While these differing approaches are not expected to immediately affect ratings assigned to investment managers, pension funds and/or the institutions sponsoring such plans, we anticipate they will translate into differing investment considerations, risks and potential returns over the longer term, Fitch said.

The brief also predicted that the diverging regulatory paths are unlikely to converge in the near term given the U.S. Department of Labors historical conservative stance amid the evolution of ESG investing in the EU/U.K.

In June, the Labor Department proposed a rule for retirement plans governed by the Employee Retirement Income Security Act to prohibit using those assets for furthering ESG objectives. A second proposal in August would require plans to cast shareholder votes only on issues with a direct economic effect on a retirement plan.

In contrast to the DOLs approach, regulation in the EU and U.K. promotes the integration of sustainability and ESG concepts into financial decision-making, which has become a more common and/or formalized consideration for pension fund managers. The European Commissions proposed amendment to Markets in Financial Instruments Directive II rules would mandate that investment firms consider the ESG preferences of their retail clients when providing investment advice, Fitch said.

The ESG investing trend is expected to persist, said Fitch, noting that the first half of 2020 saw global inflows of $59 billion, with total ESG assets under management reaching $2.2 trillion globally, according to Lipper.

The shift in social and political attitudes that has fueled demand for sustainable investing is accelerating as investors, public institutions and corporations increasingly prioritize ESG measures as part of their investment criteria, while market participants increasingly believe that ESG factors can have material impact on long-term investment returns, Fitch said.

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US regulators split with EU/UK over ESG investing The energy sector is at the forefront of ESG - EnerCom Inc.

Prime Minister Boris Johnson attends a virtual press conference at Downing Street on September 9, 2020 in London.

WPA Pool | Getty Images News | Getty Images

It looks increasingly unlikely that the U.K. will reach a trade agreement with the European Union and that could also harm the chances of a future deal with the United States.

The U.K. government outlined on Wednesday how it plans to manage trade following its full breakup from the EU at the end of the year with two significantannouncements.

Firstly, it proposed legislation, called theInternal Market Bill, which gives the U.K. government stronger powers over trade rules in Scotland, Wales and Northern Ireland - something lawmakers in these countries have issue with.

Secondly, the government said the U.K. would not follow EU rules for state aid a key stumbling block in the negotiations with Europe to date. Instead, it will apply state aid rules agreed at the World Trade Organization level, which are less strict.

"It's a recipe for disaster," Paolo Palmigiano, partner at the law firm Taylor Wessing, told CNBC.

The proposed legislation has to be approved by the U.K. Parliament before becoming law.

However, itraises questions about the U.K.'s ability to apply a WTO framework which is meant to solve trade issues between two different nations to its unique four-nation formation. In addition, the publication of the Internal Market Billputs ongoing trade talks with the European Union at risk.

Ursula von der Leyen, European Commission president, said on Wednesday that she was "very concerned about the announcement from the British government."

To leave the European Union, the U.K. government put into law the Withdrawal Agreement in January. Its implementation is a precondition for the EU to sign any trade deal with the U.K. government.

In the Withdrawal Agreement, the U.K. agreed that state aid given by the U.K. government above a certain threshold that would impact trade between Northern Ireland and the rest of the EU would have to be approved by the European Commission.

Under the latest government bill, the U.K. government is overriding that part of the Withdrawal Agreement by giving its ministers the power to "disapply" that specific law concerning state aid.

"The Bill is in breach of this obligation," Palmigiano said.

As a result, law experts, politicians and even a member of the U.K. government have said that the Internal Market Bill, if approved by U.K. lawmakers, would break international law.

This is where the United States would have an issue too.

Nancy Pelosi, the speaker of the House and a vocal Democrat lawmaker, said Wednesday that if the U.K. violates its international agreements, "there will be absolutely no chance of a U.S.-U.K. trade agreement passing the Congress."

The U.K. government could put its international credibility at risk if it indeed overrides parts of its already-legislated exit agreement with the EU.

European and U.K. officials are having emergency talks Thursday, however, some analysts have updated their forecasts in the last 48 hours and are now expecting a total rupture in trade negotiations between the EU and the U.K.

"We now think no deal is the most likely outcome at the end of the year, a 60% probability," analysts at consulting firm Eurasia Group said Wednesday.

Former European Commission President Jean-Claude Juncker said Tuesday that no deal was the most likely outcome too.

Others believe the legal changes are "negotiating tactics" from the U.K. government to get concessions in the trade negotiations with the EU.

Both sides have said they have only until mid-October to agree on new trade rules.

The U.K. is currently in a transition phase after it stopped being a member of the EU in January, but this will expire on Dec. 31.

The rest is here:
UK's post-Brexit plan puts trade deal with the EU and the U.S. at risk - CNBC

Facebook is facing the prospect of not being able to move data about its European users to the United States, after European regulators raised concerns that such transfers do not adequately protect the information from American government surveillance.

The social network said on Wednesday that the Irish Data Protection Commission had begun an inquiry into its movement of data on European users to the United States. The Irish regulator oversees Facebooks data practices in Europe and can fine it up to 4 percent of its global revenue for breaking European data protection laws.

The Silicon Valley company may now have to overhaul its operations to keep data on Europeans stored within the European Union, an immensely complicated task given the way that Facebook moves data among data centers around the world.

The inquiry, earlier reported by The Wall Street Journal, is the first major fallout of a European Union high court decision in July that invalidated a key trans-Atlantic agreement called Privacy Shield. That agreement between the United States and European Union had allowed businesses to send data between the two regions, but the court struck it down, saying Europeans did not have sufficient protections from American spy agencies.

The ruling affects thousands of businesses, but Facebooks data-sharing practices have been under particular scrutiny by European authorities. Facebook had argued that the court allowed certain kinds of legal contracts to continue transferring data, but Irish regulators disagreed and said those arrangements were invalid.

Facebook has until later this month to respond to Irelands complaint, then the Irish regulator will make a final decision toward the end of the year. Facebook could challenge that judgment in court.

A lack of safe, secure and legal international data transfers would damage the economy and hamper the growth of data-driven businesses in the E.U., just as we seek a recovery from Covid-19, Nick Clegg, Facebooks vice president of global affairs, said of the moves. The impact would be felt by businesses large and small, across multiple sectors.

Irelands Data Protection Commission declined to comment.

Facebooks experience will be closely watched by other major tech companies, like Google, that also depend on transferring data between the United States and Europe.

American and European officials have expressed a desire to work out a new data-sharing agreement. But legal experts have said complying with the European court ruling will require substantive changes to American surveillance laws to give Europeans added privacy protections.

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Facebook May Be Ordered to Change Data Practices in Europe - The New York Times

President of the European Commission Jean-Claude Juncker delivers a speech during a session of the European Parliament on Brexit on January 30, 2019 in Brussels, Belgium.

Thierry Monasse | Getty Images

U.K. and EU negotiators are unlikely to reach a trade agreement in the coming months, Jean-Claude Juncker, the former president of the European Commission, said at an event Tuesday.

The two negotiating teams started their eighth round of discussions over new trade arrangements on Tuesday a necessary step after the U.K. left the European Union in January and agreed to work toward a trade deal with the bloc, to be implemented in January 2021.

However, the trade talks have not made any significant progress so far and there are growing doubts that this will change in the coming weeks.

"The situation is not developing in the best direction possible," Jean-Claude Juncker, who led the executive arm of the EU between 2014 and 2019, said at an event hosted by financial services company Principal.

"No deal is the most possible and probable, the only outcome of the negotiations," Juncker, who often played a key role in prior Brexit negotiations, said.

Tensions between both sides of the English Channel have risen in recent days, with reports that the U.K. government is preparing to override parts of the Withdrawal Agreement the deal that allowed for its orderly departure and for a transition period throughout 2020.

Flouting parts of that agreement would diminish trust in trade talks; the EU has said that the implementation of the Withdrawal Agreement is a precondition to any trade deal.

"I trust the British government to implement the Withdrawal Agreement, an obligation under international law and prerequisite for any future partnership," Ursula von der Leyen, president of the European Commission, said Monday.

In addition, U.K. and EU negotiators have been unable to agree on state aid and new rules on fisheries since trade talks began earlier this year.

Speaking Sunday evening, U.K. Prime Minister Boris Johnson said that if they could not overcome these differences by October 15, "then I do not see that there will be a free trade agreement between us.

This would mean that as of January 1, EU-U.K. trade would follow the World Trade Organization rules. In practical terms, this could increase costs for companies on both sides.

According to Juncker, the U.K. government doesn't "understand that there is no way to be part of the internal market without agreeing to common rules."

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No-deal Brexit is the most likely outcome of trade talks, former EU chief says - CNBC