Today, 24th of May, the European Commission has revealed its first legislative package as a follow-up to the Action Plan on sustainable finance launched on the 8th March. The Sustainable Finance chapter the European Commission has been crafting through its praiseworthy initiatives is geared at hardwiring sustainability in the Capital Markets Union, Junker’s financial plan for Europe. The Commission has been working relentlessly in order to ensure putting in place all building blocks of the Capital Markets Union by mid-2019. The measures presented today, and all the CMU proposals that will be presented by end of May 2018, should be adopted before the European Parliament elections in 2019. The eagerly awaited package comprises three major legislative proposals touching upon some of the pillars of the European Commission to achieve its sustainable finance strategy:
A unified EU classification system (‘taxonomy’): The proposal will help define through the delegated acts those activities which qualify as ‘sustainable’ and which will be determined through the work of the technical expert group set to carry on this task. The achievement of this goal will help greatly to inform investors on how to direct their investments, while at the same time, laying the foundations for standards and labels around financial products going forward. The taxonomy will at first define climate specific goals and then will be extended to the environment, enlarging the scope of the objectives looked at. (Will be directed to the Member States but also asset managers and institutional investors.)
Investors’ duties and disclosures: Maybe the most symbolic change part of the sustainable finance change, foresees regulation to oblige disclosure obligations on the way institutional investors integrate ESG criteria in their risk process. Much in line with Article 173 in France on a European scale, the Commission will look at specifically setting disclosure parameters for asset managers and investors to disclose how they are concretely applying the concept of fiduciary duty by sharing their work in relation to the impacts achieved.
Also drawing from the Action Plan, the Commission also launches a public consultation regarding integrating sustainability into suitability tests. This will entail amending the 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. Demanding for informed consent, this is a formal way to determine that sustainability preferences are going to be taken into account when considering the suitability of the products for their clients. (This should help a broader range of investors access sustainable investments.)
Low-carbon and positive-carbon impact benchmarks: Recognising the strategic importance of benchmarks in guiding investors to create the climate-aligned investment products, the Commission proposes today to create a new category of benchmarks, comprising low-carbon and positive-carbon impact benchmarks. The concept behind these market standards for a new low carbon category in the benchmark regulation is to help further reflect companies’ carbon footprint and therefore enhancing the quality of the disclosure and exchange with investors. Stocks will be selected based on their ability to reduce carbon emissions and for the positive-carbon benchmarks, investors will be looking at stocks which are able to account for their carbon emissions’ savings in relation to their footprint. Such a ‘positive’ carbon impact benchmark is to allow investment portfolios to be better aligned with the Paris agreement objectives below 2° C.
The Commission also takes into account ESG benchmarks and acknowledges the need for administrators to disclose the way they manage to integrate ESG criteria.
‘Today, the European Commission adds yet another key milestone in the European sustainable finance chapter which complements the series of commendable initiatives taken to hardwire sustainability in the Capital Markets Union. These are concrete measures which will allow bringing that level of regulatory guidance investors seek and need in order to act. The work on a unified taxonomy for advancing sustainability, further specifications to investors’ duties disclosure, a proposal for new sustainability-related benchmarks are key areas which will allow investors to make great strides to align their investments with a sustainable financial future,’ says Flavia Micilotta, Eurosif Executive Director and HLEG member.
Eurosif and its members warmly welcome this major legislative milestone for the sustainable finance project in the EU!
To read the legislative proposals on sustainable finance, please click here.
To read the European Commission press release, please click here.