Topic:

Sustainable Finance
Summary

In May 2018, the Commission adopted a package of measures implementing several key actions announced in its action plan on sustainable finance. The action plan sets out a comprehensive strategy to further connect finance with sustainability. The key actions include:

• establishing a clear and detailed EU classification system – or taxonomy – for sustainable activities. This will create a common language for all actors in the financial system;
• establishing EU labels for green financial products. This will help investors to easily identify products that comply with green or low-carbon criteria introducing measures to clarify asset managers' and institutional investors' duties regarding sustainability;
• strengthening the transparency of companies on their environmental, social and governance (ESG) policies. The Commission will evaluate current reporting requirements for issuers to ensure they provide the right information to investors;
• introducing a 'green supporting factor' in the EU prudential rules for banks and insurance companies which would mean incorporating climate risks into banks' risk management policies and supporting financial institutions that contribute to fund sustainable projects.

The legislative package consists of:

A regulation on the establishment of a framework to facilitate sustainable investment which is currently awaiting adoption by the European Parliament as at April 2020 (Taxonomy Regulation);

A  regulation on sustainability‐related disclosures in the financial services sector (Disclosure Regulation); and

A regulation amending the Benchmarks Regulation as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks (Low Carbon Benchmarks Regulation)

The Commission also sought feedback on amendments to delegated acts under the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive to include ESG considerations into the advice that investment firms and insurance distributors offer to individual clients.

The Taxonomy Regulation

This regulation establishes the conditions and the framework to gradually create a unified classification system ('taxonomy') on what can be considered an environmentally sustainable economic activity. This is a first and essential step in the efforts to channel investments into sustainable activities.

The Disclosure Regulation

This regulation will introduce disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors in their risk processes. Requirements to integrate ESG factors in investment decision-making processes, as part of their duties towards investors and beneficiaries, will be further specified through delegated acts.

The Commission intends to clarify how asset managers, insurance companies, and investment or insurance advisors should integrate sustainability risks and, where relevant, other sustainability factors in the areas of organisational requirements, operating conditions, risk management and target market assessment. This will be achieved either by amending exisitng delegated acts or adopting new delegated acts.

The Low Carbon Benchmarks Regulation

This regulation introduces a new category of benchmarks, so-called EU Climate benchmarks (the EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks), and sustainability-related disclosures for all benchmarks.

In July 2018, the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) sent a formal request to EIOPA and ESMA for technical advice in this respect. On 26 November, EIOPA followed up with a consultation its draft technical advice on possible amendments to the delegated acts under Solvency II and the Insurance Distribution Directive (IDD).

On 8th April 2020, the European Commission published a consultation on a renewed sustainable action plan. The initiative is part of one of the key strategic goals of the new European Commission – the EU Green new Deal.

The Renewed Sustainable Finance Strategy will predominantly focus on three areas:

• Strengthening the foundations for sustainable investment by creating an enabling framework, with appropriate tools and structures. Many financial and non-financial companies still focus excessively on short-term financial performance instead of their long-term development and sustainability-related challenges and opportunities.
• Increased opportunities to have a positive impact on sustainability for citizens, financial institutions and corporates. This second pillar aims at maximising the impact of the frameworks and tools in our arsenal in order to “finance green”.
• Climate and environmental risks will need to be fully managed and integrated into financial institutions and the financial system as a whole, while ensuring social risks are duly taken into account where relevant. Reducing the exposure to climate and environmental risks will further contribute to “greening finance”

On the same date the Commission also launched for consultation 2 delegated acts:

• A regulation requiring companies that publish financial benchmarks to explain clearly how environmental, social and governance criteria are reflected for each benchmark/family of benchmarks; and
• a regulation introducing minimum standards to help benchmark administrators design the ‘EU climate transition’ and ‘EU Paris-aligned’ benchmarks. These are labels designed to help investors looking to adopt a low-carbon investment strategy.