On 24 May, the European Commission released a set of legislative proposals on financing sustainable growth (so called Sustainable Finance Package). These measures are the first steps towards implementing some of the recommendations of the EU’s High-Level Expert Group on sustainable finance published in January 2018 and are part of the European Commission Action Plan on Financing Sustainable Growth of March 2018.
The proposals aim to improve the contribution of finance to sustainable and inclusive growth and to strengthen financial stability by incorporating environmental, social and governance factors into investment decision-making.
The Sustainable Finance Package includes three proposals – (1) a proposal for a regulation on the establishment of a framework to facilitate sustainable investment; (2) a proposal for a regulation on disclosures relating to sustainable investments and sustainability risks amending Directive (EU) 2016/2341 (IORPs); and (3) a proposal for a regulation amending Regulation (EU) 2016/1011 (BMR) on low carbon benchmarks and positive carbon impact benchmarks. In addition, the Commission launched consultations on targeted amendments to Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive (IDD) in respect of suitability test requirements.
Key points of the proposed legislation include:
1. Establishment of a unified sustainable finance “taxonomy” – the Commission intends to help businesses and investors to determine whether an economic activity is environmentally-sustainable by creating a common classification system. It will apply to measures adopted by Member States or the Union setting out requirements for market actors in respect of financial products or corporate bonds that are marketed as “environmentally sustainable” and for financial market participants offering financial products as environmentally sustainable investments or as investments having similar characteristics. In order to qualify as environmentally sustainable, an economic activity would have to meet requirements prescribed by the legislation;
2. Environmental, social and governance (ESG) duties and disclosures – the proposed legislation aims to improve the consistency of how institutional investors should integrate ESG factors into their investment decision-making process. The proposed legislation would apply to asset managers, insurance undertakings, occupational pension funds, insurance distributors as well as investment advisors and individual portfolio managers, in respect of all financial products and services provided;
3. Creation of low-carbon and positive-carbon impact benchmarks – the Commission proposes that the new benchmarks should reflect companies’ carbon footprint and give investors greater information on an investment portfolio’s carbon footprint. While the low-carbon benchmark would be based on a standard ‘decarbonising’ benchmark, the positive-carbon impact benchmark would allow an investment portfolio to be better aligned with the Paris agreement objective of limiting global warming to below 2° C; and
4. Amendments to MiFID II and IDD suitability tests – the Commission proposes amendments to delegated acts accompanying MiFID II and IDD that would require investment firms and insurance distributors to ask their clients about their ESG preferences and to take them into account when providing advice to the clients. Additional proposals for a delegated act covering the climate change adaptation and mitigation objectives, followed by delegated acts on protection of water and marine resources, circular economy and waste management, pollution prevention and control, and healthy ecosystems are expected in the near future.
The proposals for the regulations will be now transmitted to the European Parliament and to the Council for review and amendments. Given the upcoming summer recess in the European Parliament and the election calendar next year, it seems unlikely that work on the basic legislative proposals will be completed before the end of this Parliament’s term.