Sustainable finance

Sustainable finance

Background

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”.

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

Regulation on disclosures relating to sustainable investments and sustainability risks

Following negotiations, the European Commission, the European Parliament and the Council of the EU reached an agreement on the final text of this Regulation in early 2019. The Regulation will be published in the Official Journal of the EU shortly and will start to apply 15 months following the date of publication.

This 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.

Regulation on low carbon and positive carbon impact benchmarks

Following negotiations, the European Commission, the European Parliament and the Council of the EU reached an agreement on the final text of this Regulation in early 2019. The Regulation will be published in the Official Journal of the EU shortly.

This 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:

  • 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.

Regulation on Taxonomy – Ecolabels – EU Green Bond Standard

This Regulation is not yet finalised. Following publication by the Commission, the proposal was sent to the European Parliament and the Council of the EU which are still examining the text. The proposal on taxonomy sets out uniform criteria, i.e. a standard EU-level definition, of what qualifies as an environmentally sustainable economic activity for the purposes of determining the degree of sustainability of an investment. The aim is a gradual development of an EU taxonomy, first for determining environmentally sustainable economic activities and later, following review, socially sustainable economic activities. Taxonomy is not a mandatory list to invest in, nor a standard, nor an exclusion list.According to the Commission, such EU taxonomy will provide the basis for using that classification system in different areas (e.g. standards, labels, sustainability benchmarks).

In the framework of the EU sustainability taxonomy, the Joint Research Centre, 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. 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 proposes to start with a narrower product scope that could be extended in future revisions. A 2nd draft Technical Report is expected to be published in September 2019 and a 3rd Technical Report in January 2020, while the draft Final Criteria are expected to be published in May 2020 and officially adopted by November 2020.

The Technical Expert Group 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 proposes a voluntary EU GBS building on existing market practices and closely linked to the EU taxonomy. The EU GBS will be accessible to issuers located in the EU and also to issuers outside the EU, and it will rely on a verification and an accreditation structure. The TEG will present its report to the EC in June 2019.

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 will officially adopt these rules once the new disclosure provisions for sustainable investments and sustainability risks have been agreed at EU level. Once adopted by the Commission, the delegated acts will enter into force after their publication in the Official Journal, unless the European Parliament and the Council object to them within a period of three months (extendable to six months).

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 Advices of EIOPA and ESMA.

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