EU Commission: Legislative proposals on sustainable finance
As a follow-up to its action plan on sustainable finance, the EU Commission has presented three legislative proposals on 24 May 2018:
EU environmentally-sustainable taxonomy
With its proposals, the Commission aims to embed the future EU taxonomy in EU law and standardise the concept of environmentally sustainable investment across the European Union. The proposal introduces a disclosure measure which will apply only to those who offer financial products that they claim to be environmentally sustainable. If e.g. a fund manager offers a fund claiming it is a 'green fund', then for that particular fund the manager will have to indicate the way and the extent to which the criteria for environmentally sustainable economic activities were used to determine the environmental sustainability of the investment in the fund's pre-contractual disclosure document.
The EU environmentally-sustainable taxonomy aims to identify which and to what degree economic activities can be considered environmentally-sustainable. The proposal defines six environmental objectives: 1) climate change mitigation; 2) climate change adaptation; 3) sustainable use and protection of water and marine resources; 4) transition to a circular economy, waste prevention and recycling; 5) pollution prevention and control; and 6) protection of healthy ecosystems. Economic activities will have to contribute substantively to at least one of these to be considered eligible. The Commission will adopt delegated acts to specify technical screening criteria for what qualifies as a substantial contribution to a given environmental objective for a given economic activity and what is considered to cause significant harm to other objectives. The first delegated act covering the climate change adaptation and mitigation objectives could be adopted by year-end 2019, the second and third delegated acts by mid-2021 and mid-2022 respectively covering other four other environmental objectives.
ESG duties of financial actors
The Commission is proposing a harmonised EU approach to the integration of ESG risks and opportunities in the procedures of institutional investors, asset managers, insurance distributors and investment advisors, as part of their duty to act in the best interest of clients. It also sets uniform rules on how those financial market participants should inform investors about their compliance with the integration of ESG risks and opportunities.
The proposed regulation will apply to the following entities:
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asset managers, regulated under the directive on undertakings for collective investment in transferable securities (UCITS), the alternative investment fund managers (AIFM) directive, the European venture capital funds (EuVECA) and European social entrepreneurship funds (EuSEF) regulations;
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institutional investors
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insurance distributors regulated by the insurance distribution directive (IDD)
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investment advisors and individual portfolio managers regulated by Markets in financial instruments directive (MiFID II).
ESG disclosures
The Commission proposal requires disclosure of the procedures financial actors have in place to integrate ESG risks into their investment and advisory process; and the extent to which ESG risks are expected to have an impact on the returns of the product or service provided, irrespective of whether or not sustainable investment objectives are pursued.
If asset managers or institutional investors claim that they pursue a strategy with sustainability investment objectives, they will have to provide information on how they adhere to those sustainability objectives in their investment decisions. This includes the disclosure of the sustainability or climate impact of their products and portfolios.
Low carbon benchmarks and positive carbon impact benchmarks
The Commission proposes to create two new benchmarks:
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The low-carbon benchmark based on 'decarbonising' a standard benchmark (e.g., an equity index like the Standards and Poor's 500). The underlying stocks would be selected on account of their reduced carbon emissions, when compared to stocks constituting a standard benchmark.
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In contrast, the positive-carbon impact benchmark is a more ambitious version aligned with the second Paris agreement objective. The underlying stocks are selected on account of their carbon emission savings exceeding the stocks' residual carbon footprint. This is the only type of benchmarks that would be compliant with the 2° objective in the Paris Climate Agreement.
MiFID II and IDD
The amendments to MiFID II and IDD delegated acts, for which a public consultation is launched, would require investment firms and insurance distributors to ask their clients about their preferences as regards ESG, and then to take them into account when advising their clients, as part of the product selection process and the suitability assessment.
