Sustainable finance

Sustainable finance


On 24 May 2018, the European Commission published three proposals for EU Regulations aiming at connecting finance with the EU’s sustainable development agenda. The proposals include measures to: i) create an EU classification system for sustainable investments – known as taxonomy; ii) introduce disclosures relating to sustainable investments and sustainability risks; iii) and establish low-carbon benchmarks and positive carbon impact benchmarks.

Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union­ said: “Only with the help of the financial sector can we fill the annual €180 billion funding gap to reach our 2030 climate and energy targets. This will help to support a sustainable future for generations to come”.


On 8 April 2020, the European Commission launched a consultation on its Renewed Sustainable Finance Strategy which builds on the 2018 Action Plan.

Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People said: “We are currently battling the coronavirus outbreak, but we must not lose sight of our long-term sustainability objectives, including making Europe climate-neutral by 2050. Creating a more sustainable and resilient economy will be a key focus of the recovery phase and the Renewed Sustainable Finance Strategy will be essential to mobilising much-needed capital. This consultation is an opportunity for all Europeans, companies, civil society organisations and public authorities to contribute to the EU's sustainable finance agenda, and how it can contribute to the economic recovery”.

BIPAR, together with its member associations, is actively following the Sustainable Finance Package throughout the EU legislative procedure.

Regulation on disclosures relating to sustainable investments and sustainability risks

The Regulation on “sustainability-related disclosures in the financial services sector” was published in the Official Journal of the EU in November 2019 (Regulation 2019/2088). All language versions of this Regulation can be found here. The Disclosures Regulation will start to apply on 10 March 2021 (15 months following the publication date). The regulatory technical standards to be developed by the Joint Committee of ESAs in order to specify the details of the presentation and content of the information to be disclosed will start to apply on 1 January 2022.

The Disclosures Regulation introduces transparency obligations on how insurance intermediaries, investment firms and financial market participants integrate environmental, social and governance (ESG) risks in their investment decisions and advice processes, as part of their duty to act in accordance with the best interests of their clients.Under this Regulation, insurance intermediaries who provide advice with regard to IBIPs and investment firms which provide investment advice are required to:

  • include in their processes and assess on a continuous basis, not only all relevant financial risks, but also all relevant sustainability risks that may have a material negative impact on the returns of financial products.
  • have in place policies on how they integrate sustainability risks in their investment advice and publish them on their websites.
  • include in their remuneration policies information on how their remuneration policies are consistent with the integration of sustainability risks, and publish that information on their websites.

The objective of these new rules is to eliminate greenwashing, i.e. the risk that products and services which are marketed as sustainable or climate friendly in reality do not meet the sustainability objectives claimed to be pursued, and to increase market awareness on sustainability matters. The three European Supervisory Authorities (ESAs), and in particular the Joint Committee of the Authorities, will further develop technical standards to ensure harmonisation of disclosures in all the sectors concerned.

During the whole EU legislative process, BIPAR stressed the importance of establishing a clear and consistent legal framework and warned that if due attention is not paid there may be duplications of requirements in the various sustainability-related legal texts that could undermine legal certainty. Moreover, BIPAR expressed the view that the scope of sustainability-related disclosure requirements should be limited to products marketed as pursuing ESG objectives and that these requirements should start to apply only after a well-built taxonomy has been established. Finally, remuneration policies should not provide an incentive to recommend a particular (ESG) product to customers.

ESAs Joint Consultation on ESG Disclosures

On 23 April 2020, the three European Supervisory Authorities (EIOPA, ESMA and EBA - ESAs) have issued a Consultation Paper seeking input on their proposal for environmental, social and governance (ESG) disclosure standards – called Regulatory Technical Standards- for financial market participants and financial advisers. The consultation paper and the draft Regulatory Technical Standards relate to several disclosure obligations laid down in the Regulation on sustainability-related disclosures in the financial services sector (Disclosures Regulation). This dossier is of particular importance for insurance and financial intermediaries as they fall within the scope of the Disclosures Regulation.

The draft Regulatory Technical Standards are proposed with regards to the publication of:

  • entity-level principal adverse impact disclosures. Financial advisers should publish on their website an “adverse sustainability impacts statement” which contains details on the process to select the financial products they advise on. When financial advisers do not consider the adverse impacts of investment decisions on sustainability factors in their investment advice or insurance advice, they shall publish information with the reason for why they do not do so.
  • product level ESG disclosures. For financial products with sustainability (environmental or social) characteristics or for financial products that have sustainability objectives, financial market participants, including intermediaries who act as product providers, pension products manufacturers or portfolio management providers, should disclose information in their: (a) pre-contractual disclosures, (b) periodic documentation, and (c) on their website.

The consultation will be open until 1 September 2020. Following the close of the consultation, the draft RTS will be finalised and submitted to the European Commission.

Regulation on Taxonomy – EU Green Bond Standard – EU Ecolabel

Following negotiations, the European Commission, the European Parliament and the Council of the EU reached an agreement on the final text of the Taxonomy Regulation in December 2019. The taxonomy will be a EU-wide classification system which will provide a common language to identify what economic activities can be considered environmentally sustainable for the purposes of determining the degree of sustainability of an investment.

The Taxonomy will based on six EU 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;
  5. pollution prevention and control; and
  6. protection and restauration of biodiversity and ecosystems.

For an economic activity to qualify as environmentally sustainable, the following requirements shall be fulfilled. The economic activity must:

  1. contribute substantively to at least one of the six environmental objectives listed above;
  2. not significantly harm any of the environmental objectives;
  3. be carried out in compliance with minimum social safeguards;
  4. comply with specific “technical screening criteria”.
  • Scope
  • Disclosure obligations
  • Time of application

The Taxonomy Regulation applies in principle to (all) financial products made available by financial market participants. “Financial market participants” means any insurance undertaking which makes available an IBIP, any investment firm or credit institution which provides portfolio management, an IORP, a manufacturer of pension products, an AIFM, a PEPP provider, a UCITS management company, a manager of a qualifying venture capital fund or of a qualifying social entrepreneurship fund. Consequently, the Taxonomy Regulation does not apply (directly) to insurance intermediaries that provide insurance advice with regard to IBIPs and investment firms which provide investment advice. On the contrary, the Disclosures Regulation applies to intermediaries directly.

The Taxonomy can be used, not only for designing green financial products by those marketing portfolio management, UCITS funds, alternative investment funds (AIFs), insurance-based investment products (IBIP), pension products and pension schemes, but also for selecting holdings, identifying/expressing investment preferences or measuring the environmental performance of an equity or bond fund.

Furthermore, according to the latest draft amendments to the IDD Delegated Act and MiFID II Delegated Act (expected to be adopted by the EC shortly), financial and insurance intermediaries will be required to take into account the clients’ Environmental, Social and Governance (ESG) preferences, if any, in the suitability assessment before providing investment advice. The Taxonomy can be therefore useful for financial and insurance intermediaries to identify their client’s ESG preferences and to recommend products which correspond to such preferences.

The Taxonomy Regulation introduces further disclosure obligations. A distinction is made between financial products that have environmental investment as its objective -“dark green” financial products- and financial products that promote environmental and social characteristic -“light green” financial products- in line with the distinction made in the Disclosures Regulation (Art.9 & Art.8 respectively). In these two categories, the information to be disclosed by those making available financial products should include a) information on the environmental objective(s) to which the investment underlying the financial product contributes, and b) a description of how and to what extent the investments underlying the financial product are invested in environmentally sustainable economic activities. The “light green” products should be also accompanied by the statement: “the investments underlying the remaining portion of this financial product do not take into account the EU criteria for environmentally sustainable investments”. Where financial products do not have environmental investment as its objective or they do not promote environmental or social characteristics , they should be accompanied by a disclaimer.

The Taxonomy Regulation will be published in the EU Official Journal (OJ) following formal adoption by the Council of the EU (National Ministers) and the EP (plenary) and following legal linguistic revision.

Once published in the OJ, the Regulation will enter into force 20 days after its publication. It will be binding in its entirety and directly applicable in all Member States. It will apply by 31 December 2021 as regards the (1) and (2) environmental objectives and by 31 December 2022 as regards the (3), (4), (5) and (6) environmental objectives, as mentioned above.

EU Green Bond Standard

The Technical Expert Group (TEG) on Sustainable Finance set up by the European Commission launched in March 2019 a call for feedback on its preliminary recommendations for the development of an EU Green Bond Standard (GBS). The TEG proposed a voluntary EU GBS building on existing market practices and closely linked to the EU taxonomy. The EU GBS is planned to be accessible to issuers located in the EU and also to issuers outside the EU, and to rely on a verification and an accreditation structure. The TEG presented its Report on EU Green Bond Standard to the EC in June 2019 which reflected the feedback received from stakeholders and the analysis conducted by the Group.

In March 2020, the TEG on Sustainable Finance published its usability guide for the EU Green Bond Standard. The Guide offers recommendations to the potential issuers, verifiers and investors of EU Green Bonds, on the practical application of the EU GBS, as it was described in the TEG Report on the EU Green Bond. The TEG reiterates that the use of EU GBS remains voluntary. Issuers of green bonds that do not want to use the term “EU Green Bond” and prefer opting for other market practices are not obliged to follow the four components of the EU GBS. The TEG proposes that any type of listed or unlisted bond or capital market debt instrument issued by a European or international issuer that is aligned with the EU GBS should qualify as an EU Green Bond. The proposed EU GBS sets out four core components:

  • The alignment of the use-of-proceeds with the EU Taxonomy.
  • The content of a Green Bond Framework (GBF) to be produced by the issuer to explain to investors and other market participants their approach and disclosures for bond issuance aligned with the EU GBS.
  • The required Allocation Reporting and Impact Reporting. This is information on the total proceeds, the amount allocated as of the end of the reporting period, as well as a breakdown by activities (e.g. renewable energy (solar and wind), energy efficient buildings, public transport etc.), and reference to the environmental objectives and the environmental impact.
  • The requirements for external verification by an approved verifier. The EU GBS institutes mandatory prior (before or at the time of issuance) verification of the alignment of Green Bond with the Taxonomy as well as ex-post verification of the actual allocation of the proceeds to green eligible projects as listed in the Allocation Reporting.

The European Commission will explore the possibility of a legislative initiative for an EU Green Bond Standard. The EC will collect feedback on the EU GBS in the context of the public consultation on the renewed sustainable finance strategy, taking place from 8 April to 15 July 2020. A separate dedicated consultation with regards to a Commission initiative for an EU GBS will be carried out in the future.

EU Ecolabel

In its Action Plan on Sustainable Finance published in March 2018, the European Commission mentions that the Commission sees the potential merit in the use of the EU Ecolabel Regulation to create a voluntary EU-wide labelling scheme. In this framework, the European Commission is currently developing a EU Ecolabel for Retail Financial Products. This action is linked to two other actions included in the Action Plan: the EU Taxonomy and the EU Green Bond Standard. The objective sought by EU standards and labels for sustainable financial products is to protect the integrity of and trust in the sustainable financial market, as well as enable easier access for investors seeking those products.

The Joint Research Centre (JRC), the Commission’s in-house science service, published in March 2019 a 1st draft Technical Report proposing EU Ecolabel criteria for retail financial products, mainly PRIIPs and IBIPs. PRIIPs encompass investment funds (UCITS & RAIFs) and insurance products with an investment component (unit-linked insurance). The EU Ecolabel criteria will determine which products are sufficiently “green” to be awarded with the EU Ecolabel by competent bodies following a verification process. The Report proposed to start with a narrower product scope that could be extended in future revisions. In March 2020, the JRC presented to the ad hoc working group its 2nd draft Technical Report. The main changes in this second version are fourfold:

  • The thresholds regarding the exposure of the constituents to green activities were significantly reduced;
  • Criteria on ‘Engagement’ were added;
  • The rule regarding the exposure of green bond issuers to brown activities have been clarified: there is no limit;
  • A discussion of the available scientific evidence has been introduced, in an attempt to comply with the obligations of the Ecolabel Regulation.
  • EU climate transition benchmarks, which aim to lower the carbon footprint of a standard investment portfolio. More precisely, this type of benchmark should be determined as taking into account companies that follow a measurable, science-based "decarbonisation trajectory" by end 2022.
  • EU Paris-aligned benchmarks, which have the more ambitious goal of selecting only components that contribute to attaining the 20C reduction set out in the Paris climate agreement.

The 3rd draft Technical Repot is expected to be presented by September/October 2020 and the European Commission is expected to adopt its Decision in Q2 2021.

Regulation on low carbon and positive carbon impact benchmarks

The Regulation onEU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks was published in the Official Journal of the EU (Regulation 2019/2089). All language versions of this Regulation can be found here. The Benchmarks Regulation will start to apply on the day following its publication, i.e. on 10 December 2019.

The Benchmarks Regulation introduces a harmonised regime creating a new category of financial benchmarks aimed at giving greater information on an investment portfolio's carbon footprint. This new category, which is a voluntary label, comprises two types of financial benchmarks:

Amendments to the IDD and MiFID to integrate ESG preferences in advice

Following a public consultation launched in May 2018, to which BIPAR contributed, the European Commission published draft rules amending the Delegated Regulations under the IDD and MiFID II.The objective of these amendments is to ensure that investment firms and insurance distributors who provide advice on IBIPs take ESG considerations and their clients’ ESG preferences into account in the suitability assessment they undertake to see if proposed investments are appropriate for a client.

The Commission is expected to officially adopt these rules, following the adoption of the new disclosure provisions for sustainable investments and sustainability risks and of the taxonomy. Once adopted by the Commission, the amended delegated acts will enter into force after their publication in the EU Official Journal, unless the European Parliament and the Council object to them within a period of three months (extendable to six months).

The Commission consultation on the Renewed Sustainable Finance Strategy, which will run until 15 July 2020, includes questions on these proposed amendments (see below).

EIOPA and ESMA Technical Advice on integrating sustainability risks in the IDD and MiFID II

On 3 May 2019, EIOPA published its Technical Advice to the European Commission on possible amendments to the IDD and Solvency II Delegated Acts to integrate sustainability risks and factors.The IDD section covers conflict of interests (related to organisational requirements) and product oversight and governance (related to the target market assessment). The Advice proposes that insurance intermediaries:

  • should include a clear reference in their conflict of interests’ policy on how conflict of interests relating to ESG considerations are identified and managed.
  • should consider ESG factors in the product approval process of any insurance product – not only IBIP-, only if the insurance product is supposed to have an ESG profile.

ESMA also published its Technical Advice to the European Commission on possible amendments to the MiFID II Delegated Act to integrate sustainability risks and factors. The Advice proposes to introduce a clear reference to ESG considerations in the provisions on general organisational requirements, risk management, conflicts of interest and product oversight and governance.ESMA also published its Technical Advice for the integration of sustainability risks and factors in the UCITS Directive and AIFM (Alternative Investment Fund Managers) Directive.

The Commission will consider whether or not to amend the IDD and MiFID II Delegated Acts according to the Technical Advice of EIOPA and ESMA.

Renewed Sustainable Finance Strategy 2020

On 8 April 2020, the European Commission has launched a consultation on its Renewed Sustainable Finance Strategy. The aim of this consultation is to collect feedback to feed into the Commission's work to help mobilise private investment in sustainable projects. The Commission's aim is to adopt the Renewed Sustainable Finance Strategy in the second half of 2020. This is an integral part of the European Green Deal and according to the Commission, the ongoing coronavirus outbreak highlights the critical need to strengthen the sustainability and resilience of our economies in the future.

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

  1. Strengthening the foundations for sustainable investment by creating an enabling framework (taxonomy, benchmarks, disclosure requirements). Many financial and non-financial companies still focus on short-term financial performance instead of their long-term development and sustainability-related challenges and opportunities.
  2. Increased opportunities for citizens, financial institutions and corporates to have a positive impact on sustainability (environment and society). This second pillar aims at maximising the impact of the frameworks and tools in the EU arsenal in order to “finance green”.
  3. 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”.

The consultation will be open until 15 July 2020. The consultation reiterates that the Commission will soon publish the amended delegated acts of MIFID II and IDD, which will require investment advisors to ask retail investors about their sustainability preferences. The Commission is also asking the stakeholders’ opinion about insurers’ obligation to finance the transition and manage climate and environmental risks. The Commission will soon launch an inception impact assessment to consider clarification on insurers’ obligation regarding sustainability risks, as part of the review of Solvency II. Furthermore, some questions are dedicated to the EU Green Bond Standard and to pension providers. Finally, the Commission explores the potential of social and catastrophe bonds to help mobilise the broadest possible range of private finance alongside public budgets to contribute to the resilience of the EU’s health and economic systems, via prevention and reinsurance, as according to EIOPA insurability is likely to be an increasing concern.

BIPAR has launched an internal consultation amongst its member associations and based on the feedback collected it will submit its contribution to the Commission.

Review of Non-Financial Reporting Directive

In the framework of the EU sustainable finance strategy, the European Commission aims to review the Non-Financial Reporting Directive (NFRD) in 2020. In February 2020, the Commission launched a consultation on the NFRD. The Commission consultation aims to collect views from across the EU on different possible reforms or improvements that could be made to the NFRD in order to improve corporate transparency and provide all stakeholders with more comparable and relevant information on sustainable economic activities.

The NFRD requires large public-interest companies (listed companies, banks, insurers) with more than 500 employees to include a non-financial statement as part of their annual public reporting obligations. Although SMEs are not currently covered by the Directive, the new requirements on disclosing non-financial information laid down in the Regulation on “sustainability-related disclosure in the financial services sector” and in the Taxonomy Regulation (see above), will have an impact on SMEs:

  • large enterprises will need information from their SME suppliers to fulfil their reporting obligations;
  • banks may have to report about the sustainability of their loan portfolios;
  • SMEs may be interested to prove that a project, for which they look for finance or public support, is sustainable.

However, requiring SMEs to apply the same standards as large companies will be a disproportionate burden for SMEs. This consultation is seeking, among others, feedback on the possibility to develop a simplified sustainability reporting standard for SMEs. In the same light, the Commission is collecting views on the possibility to broaden the scope of the Directive to cover EU companies with securities listed in regulated markets with more than 250 employees (or even regardless their size) and their subsidiaries which may not meet this condition as well as to cover large non-listed companies. The consultation will be open until 11 June 2020.

- Published on June 2020 -

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