Sustainable Finance Disclosures Regulation (SFDR)
The Regulation on sustainability-related disclosures in the financial services sector (Sustainable Finance Disclosures Regulation or SFDR) became applicable on 10 March 2021. It introduces new disclosure obligations for insurance intermediaries providing advice with regard to insurance-based investment products (IBIPs) and for investment firms in order to integrate sustainability factors in their investment decisions and advice processes, as part of their duty to act in the best interest of clients. SFDR provides for an exemption from its scope for self-employed and entities with less than three employees. Member States may decide to opt-out from this exemption.
These sustainability-related obligations apply to all financial products as defined in SFDR, including IBIPs, portfolio management, pension products and PEPPs, regardless of whether or not they are designed as “green” products with an ESG profile (Environmental, Social and Governance).
There are disclosure obligations at entity- and at product level.
Insurance and financial intermediaries must:
- publish information on their websites about their policies on the integration of sustainability risks in their investment advice or insurance advice,
- publish on their websites and include information on how their remuneration policies are consistent with the integration of sustainability risks,
- publish on their websites information as to whether they consider in their investment advice or insurance advice the principal adverse impacts on sustainability factors or information as to why they do not do so.
- disclose, as pre-contractual disclosures in relation to each financial product, (i) the manner in which sustainability risks are integrated in their investment/insurance advice, and (ii) the result of the assessment of the likely impacts of sustainability risks on the returns of the financial products they advise on,
- ensure that any information published is up to date.
- ensure that their marketing communications do not contradict the information disclosed pursuant to SFDR.
When acting as product manufacturers, insurance and financial intermediaries will be required to make additional disclosures at entity level, at pre-contractual level and at periodic level about the green financial products they make available. Under the SFDR, green products can either:
- have only sustainable investment as their objective (“dark green”, Article 9 of SFDR), or
- promote environmental or social characteristics (“light green”, Article 8 of SFDR).
Environmental Liability Directive (ELD)
The Environmental Liability Directive (ELD - adopted in 2004 and first evaluated in 2016) sets out an environmental liability framework to prevent and remedy environmental damage to pre-damage condition when it is caused by economic operators. It contains the “polluter pays” principle. One of the issues that has come up over the years in the discussion at European level is the availability (at reasonable costs) of insurance and other types of financial security, and the need or not for mandatory financial security.
The ELD requires the European Commission to carry out an evaluation before 30 April 2023 and every five years thereafter. The Commission has started this second evaluation process of the ELD, aiming to examine the effectiveness, efficiency, relevance, coherence and EU added value of the ELD. Two public consultations were launched in the summer of 2022: a general public consultation by the Commission on the evaluation of the ELD and a targeted public consultation from external service providers who are preparing a supporting study on the evaluation of the ELD on behalf of the Commission.
The questions dealt, amongst others, with:
- whether ELD influenced the availability of financial security instruments at an affordable cost;
- the availability of insurance for ELD liabilities for large/ multinational and for SME operators;
- whether intermediaries/brokers as stakeholders have been engaged in the process of improving the implementation of the ELD at Member State level.
On 22 November 2022, the Commission organised its annual workshop on ELD, which BIPAR attended. At this workshop, some preliminary findings of the evaluation study were presented and discussed.
On 12 May 2023, the Commission launched a public consultation on the “polluter pays principle” which aims to assess how the principle is applied across EU policies. BIPAR will look into this consultation, which is open for comments till early August.
BIPAR is not in favour of mandatory financial security / insurance at EU level. Some of BIPAR key messages are:
- National markets are still very different in terms of “sensibility” for this risk. Insurers from their side are not yet everywhere in Europe keen or able to take up the risk at reasonable or realistic prices.
- A mandatory regime for environmental liability insurance may be considered by clients and entrepreneurs as a “tax”.
- Considering the wide variety and the strict regulatory framework, there are probably many challenges in finding the right, “economically fair”, activity-adapted compulsory regime.
- Although the ELD brings uniformity, the local situation creates diversity.
- The discussion on environmental liability cannot be considered in a silo.
- The potential cost impact of a compulsory insurance on SMEs should be looked at.