The EU Action Plan: Your 3-Minute Recap

Here’s a quickfire refresher on the Sustainable Finance Action Plan to make sure you’re up to date with the latest regulatory requirements

Catherine Elliott 8 July, 2022 | 9:44AM
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Chances are you’re pretty familiar with the EU Sustainable Finance Action Plan. Over the past few years, its impact across the European financial sector has been substantial.

The 10-point plan aims to mobilise private finance to support sustainable economic growth in Europe while managing risks stemming from environmental, social and governance (ESG) issues. It’s part of the implementation of both the wider Paris Agreement on climate change and the UN 2030 Agenda for Sustainable Development.

While some of the legislative work has been formalised and put in place already, a lot of the implementation of the regulations will continue through 2022 and 2023, helping to place ESG considerations at the forefront of investment decision-making.

Reporting requirements and disclosures are evolving as we speak, so we’ve put together a quick reminder of what the plan encompasses and its key dates and obligations.

What are the Action Plan’s Objectives?

The European Commission proposes ten reforms based around three core sustainability objectives:

To meet the above goals, the action plan is centred on several key legislative proposals.

EU Taxonomy

The EU Taxonomy is an important tool for investors, as it provides guidance on which economic activities can be considered environmentally sustainable. The taxonomy will also be used to develop EU-wide standards for reporting and labelling sustainable financial products.

There are six environmental objectives defined by the taxonomy: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution and prevention control, and protection of healthy ecosystems.

To be deemed sustainable, an activity must substantially contribute to at least one of the six environmental objectives mentioned above, do no significant harm to any of the other objectives, and comply with minimum safeguards created to avoid negatively impacting societal stakeholders.

Key Taxonomy Dates

As of January 2022, financial institutions and non-financial companies within the scope of the Non-Financial Reporting Directive (NFRD) are required to report on eligible activities (i.e. taxonomy eligibility) for the first two requirements, climate change mitigation and climate change adaption.

From 2023, non-financial NFRD companies will then have to start reporting their own taxonomy alignment. Financial institutions only need to start reporting their taxonomy alignment beginning in 2024, at which time the necessary 2023 reported data by the non-financial undertakings they hold in their portfolios and on their books is available.

Sustainable Finance Disclosure Regulation (SFDR)

The Sustainable Finance Disclosure Regulation (SFDR) supplements the current rulebooks governing manufacturers of, and advisers on, financial products.

Broadly, managers must disclose how sustainability risks are considered in their investment process, what metrics they use to assess ESG factors, and how they consider investment decisions that might result in negative effects on sustainability factors (or Principal Adverse Impacts [PAIs] in the regulators’ language).

SFDR will, above anything else, raise the bar for investment products – particularly those seeking to promote ESG credentials (Article 8 funds) and those with ESG objectives (Article 9 funds) by setting strict minimum-disclosure standards to prevent greenwashing.

Key SFDR Dates

While SFDR was formally implemented in March 2021, reporting requirements for manufacturers and the product and advisers are still evolving over the course of 2022 and 2023. To see a detailed timeline of obligations, you can download our free guide to SFDR here.


The existing EU Benchmark Regulation has been amended in light of the EU Action Plan on two fronts. Firstly, all investment benchmarks will have to disclose if, and how, they incorporate ESG criteria into their processes.

Secondly, new standards for carbon products have also been created with two types of climate benchmarks aimed at helping investors better understand the carbon impact of their investments.

The EU Climate Transition Benchmark (EU CTB) and the EU Paris-aligned Benchmarks (EU PAD) both set new minimum criteria for climate indexes, with more stringent criteria for those aligned to the Paris Agreement. As of January 2022, administrators of significant benchmarks must provide one or more EU Climate Transition Benchmarks.

Your Compliance Journey with Morningstar

The EU Action Plan is an ambitious project, but it’s also one that marks a significant shift in the way that sustainability is incorporated into the investment and advice process.

Morningstar is continuing to monitor the developments of the EU Action Plan as its components evolve, and together with Sustainalytics, is ready to support financial services professionals during this transition period with an industry-leading set of solutions that support the EU Taxonomy, SFDR and Benchmarking regulatory requirements.

Find out more about our solution suite that supports the EU Action Plan by downloading our free guide.

Download the Free EU Action Plan Guide

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Catherine Elliott  is a content writer at Morningstar

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