Green wave in the capital market

There has been a repricing of ESG shares and Oslo Stock Exchange reports that a green loan wave yields bond record. Both issuers and other participants in the finance and capital markets will see substantial regulatory changes relating to sustainability. The EU Action Plan 'Financing Sustainable Growth' is key in this increasingly important area. Legislation is evolving in other capital market areas too. Below, we will provide an overview of some selected subjects. 

The EU Action Plan 'Financing Sustainable Growth'

Up until now no clear framework for assessing which investments and issuers that qualify as sustainable has been established through legislation. A number of initiatives have been made by investors, various organisations and institutions to define "sustainable" investments, and a market practice has evolved. At the same time, examples of "greenwashing" have been seen where financial products are marketed as environmentally friendly, when in fact they do not meet basic environmental standards. Thus, the investors have been referred to make their own assessment without guidance in clearly defined criteria.

In March 2018 the European Commission launched its Action Plan 'Financing Sustainable Growth' as part of a strategy to integrate ESG into the regulation of the financial markets and to promote sustainable investments for sustainable growth. As a first step of the Action Plan, new legislation will be introduced on four areas to ensure a harmonised practice in EU's capital markets and to foster transparency for investors. Here is a summary of the current situation:

• Classification of sustainable investments: A new regulation on the establishment of a framework to facilitate sustainable investments  was politically agreed in the EU just before year-end 2019, and is expected to be formally adopted shortly. The regulation establishes criteria for determining whether an economic activity is environmentally sustainable. According to the regulation, an economic activity shall be considered environmentally sustainable if it i) contributes substantially to at least one of the EU's six environmental objectives, ii) it does not significantly harm any of the (other) environmental objectives and iii) it is carried out in compliance with minimum social safeguards. In addition, a financial products that is marketed as environmentally sustainable shall be accompanied by information on the environmental objective to which it contributes, and to what extent the underlying investments are environmentally sustainable. The further details on how to determine whether an economic activity is environmentally sustainable, will be set out in the so-called "taxonomy" (classification) which initially will include technical criteria within seven different sectors and 67 different business activities. An expert group published a preliminary report on the EU taxonomy in June 2019 and it is expected that final rules will be adopted by end of 2020. Although the new regulation and the taxonomy will set forth comprehensive set of rules in an area which has been unregulated until now, the proposal for taxonomy is largely based on established market practice. Since the aim is to provide clarity for market participants, and to reorient capital towards sustainable investments, the EU would avoid imposing too strict requirements that could hinder the development of the market.  

• Integration of ESG in investor information: The new classification regulation also set forth disclosure requirements for large companies that have shares or bonds listed on a regulated market and more than 500 employees. Such companies must disclose information about the proportion of their turnover that derives from environmentally sustainable economic activities and the proportion of their total investments related to environmentally sustainable assets. This new requirement will also apply to non-financial undertakings, who are subject to the directive on non-financial disclosure.
  
  
• Low carbon benchmarks: The third area that will be subject to a new regulation ((EU) 2019/2089) concerns low carbon benchmarks comprising companies that contribute to reaching the EU's climate mitigation objective. Companies that are to be included in a low carbon reference index must be able to demonstrate significantly lower emissions than what otherwise applies in the investment universe. Thus, it is not enough that the emissions as such are low if the companies are part of an industry where the emissions are generally low (typically media, healthcare etc.). Low carbon benchmarks will be relevant benchmarks for low carbon funds and others with sustainable investment mandates.
  
  
• Sustainability-related disclosures from fund managers and investment advisors: The last area that will be subject to a new regulation ((EU) 2019/2088) regards sustainability-related disclosures information from fund managers and investment advisors. These shall now publish information about the integration of sustainability risk in their investment decisions or advice, how the investments impact the environment, and how the sustainability risk (typically climate risk) affects the profitability in the investments made. Additional requirements will apply to financial products that are considered sustainable or promoted as such.
  
  In addition to these new regulations, it has also been suggested to incorporate sustainability criteria into the MiFID rules and to incorporate sustainability in the suitability assessment when providing investment advice.
  
  
• EU Green Bond Standard: In addition to these legislative initiatives there is also ongoing work on the establishment of an EU Green Bond Standard. An expert group submitted a report in June 2019 suggesting a non-legal standard that will correspond to market practice in accordance with the ICMA Green Bond Principles. According to the proposal, the bonds must meet the following conditions to be considered green:

1. the bonds must finance economic activities that are considered environmentally sustainable according to the taxonomy criteria,
2. the issuer of the bonds must establish a green bond framework that describes the use of proceeds, criteria for selection of projects, and reporting,
3. the issuer must report the allocation of proceeds green projects and the impact of the financing, and
4. the green bond framework and allocation report must be reviewed by an external reviewer.

The expert group recommends that external verifiers (typically Cicero, Sustainalytics, VigeoEiris, DNV-GL, etc.) are formally accredited and supervised  by the European Securities Markets Authority ("ESMA").

Despite the comprehensive set of new rules, there are still a lot of details, such as the taxonomy, that will be set forth in delegated legislative acts. It is anticipated that most of this will be in place in the course of 2021. However, this area will be followed closely and further developed in order for the EU to reach its climate goals in the Paris Agreement.

Other initiatives

As mentioned certain criteria and market practice relating to green financial instruments exist already today.

• Oslo Stock Exchange saw a record high number of listings of green bonds in 2019 and the trend will probably continue. According to Oslo Stock Exchange's rules, green bonds must finance environmentally sustainable activities and that are certified by an independent expert in accordance with specific criteria.
   
• Euronext (Oslo Stock Exchange) recently launched new guidelines for ESG reporting in replacement of Oslo Stock Exchange's existing guidelines. The guidelines shall help the listed companies in addressing significant risks and set forth important principles that companies should take into consideration in the ESG reporting and associated Investor Relations work. The companies may use the existing (old) guidelines as basis for the annual report and/or separate ESG statement for the fiscal year 2019.

Wikborg Rein is continuously working with ESG issues for our clients and will contribute actively to information about the development in this area through seminars, workshops, newsletters and consecutive counselling. Please, contact us for further information.

Other regulatory changes

The regulations and legislation relating to the capital market is constantly changing. Below, we will provide an overview on a selection of current topics:

• MAR (EU's Market Abuse Regulation) is implemented in the EU, but its implementation in the EEA countries is pending amendments in the EEA agreement. Entry into force was expected to be in April this year, but we have now strong indications that MAR will not enter into force till 2021. MAR will entail a changed regime for the keeping of insider lists (with significantly more data points and requirements to produce "time-print" at any given time). The procedures for deferred disclosure are changing and are left more and more to the issuers to process. "Red periods" are introduced with a trading ban for primary insiders 30 days before disclosure of periodic financial information. The notification obligation rules for primary insiders will be simplified. The Financial Supervisory Authority of Norway is expected to provide guidance before MAR enters into force in Norway.
  
  
• Oslo Stock Exchange has removed rules in the continuing obligations relating to information document ("IM") and extended  notification for major transactions. As a consequence that the requirements to IM are abolished, Oslo Stock Exchange has decided that if a company which is listed on Oslo Stock Exchange or Oslo Axess significantly changes character follow a transaction and appears as a "new" company, supplementary information to the market must be published by way of preparing a document which fulfils the requirements for a "similar document" according to the prospect rules.
  
  
• New rules in the Norwegian Public Limited Liability Companies Act for listed companies in connection with significant transactions with related parties (the Norwegian Public Limited Liability Companies Act Section 3-8 et. seq.) entered into force at this turn of year. Besides the definition of what shall be considered as significant and closely related, the Norwegian Public Limited Liability Companies Act sets out further rules for the disclosure of related transactions in supplement of the Security Trading Act and the Stock Exchange rules. See previous case regarding changes in the Norwegian Private Limited Companies Act and the Norwegian Public Limited Companies Act. (Norwegian)
  
  
• The regime for public takeover bids relating to listed companies are changing. Essentially, the changes concern the process and degree of transparency around the process. 
  
  
• EU's directive regarding shareholders' rights will, when entering into force in Norway, entail that the issuer must be able to identify its beneficial shareholders also when it comes to shares held by a nominee. It has been suggested to require that nominees disclose the identity of beneficial shareholders. On the other hand, shares held by nominees will higher degree be given the possibility to exercise voting rights at the issuer's General Meeting.  

Do not hesitate to contact us for updates, workshops and other types of training and discussions concerning ESG and other matters within the capital market regime.