Further to the European Commission’s Action Plan on Sustainable Growth of March 2018, it has now issued a package of legislative proposals.
The Commission asserts that the involvement of the financial sector will greatly boost efforts to reduce the EU’s environmental footprint and enhance sustainability and competitiveness of the EU economy. It cites that the amount of catastrophe-related losses covered by insurance reached an all-time high of EUR 110 billion in 2017. Current levels of investment are not thought sufficient: more private capital flows are needed to close the EUR 180 billion gap of additional investments to meet the EU’s 2030 targets.
The Commission believes that the EU financial sector has the potential to multiply sustainable finance and become a global leader in this area. Also, it links these proposals with Capital Markets Union as they are expected to connect financial markets better with the real needs of the European economy.
A proposed Regulation aims to establish the criteria for determining whether an economic activity is ‘environmentally-sustainable’ – the taxonomy. It will apply to the following types of financial market participants:
The Regulation sets out six environmental objectives:
For an activity to be environmentally-sustainable, it must contribute substantially to one or more of these objectives, not significantly harm any of them, and comply with minimum safeguards and technical screening criteria, which will be set out in a Delegated Act.
It is notable that the main body of the rules (Articles 3-12) will not apply until six months after the relevant Delegated Acts have entered into force – that is, between July 2020 and December 2022.
The taxonomy Regulation is accompanied by four further Regulations. One covers disclosures by the financial market participants listed above. The articles largely refer to financial products, which may be difficult to implement in the context of portfolio management (a service). The disclosures cover the integration of sustainability risks, including how the firm’s remuneration policy aligns with the sustainable investment target of products, and cover both pre-contractual and periodic disclosures.
Sustainable investments include those with an environmental (as defined by the taxonomy mentioned above), social or good governance objective. The three-line definition of social objective is not the same as and does not refer to the definition in the EuSEF Regulation. This disclosure Regulation is to be underpinned by various Delegated Acts and Regulatory Technical Standards.
Another Regulation amends the Benchmarks Regulation to include references to ‘low-carbon benchmarks’ (one which has less carbon emissions compared to a standard capital-weighted benchmark) and ‘positive carbon impact benchmarks’ (for which the underlying assets are selected on the basis that their carbon emissions savings exceed the assets’ carbon footprints). Again, this Regulation will be underpinned by Delegated Acts.
The last two – short – Regulations insert into the MiFID II and IDD Delegated Regulations requirements for intermediaries to seek information about and to have regard to clients’ ESG preferences.
This is a substantial package of proposals, with very many more pages to come in the form of Delegated Acts and Regulatory Technical Standards.
The focus on a detailed taxonomy for products or investment strategies with ‘environmental’ objectives far outweighs that on social and governance considerations. The specific reference to the Taxonomy Regulation not taking effect until the various Delegated Acts are in place may be welcome by national regulators and the industry, but there is much work to be done in articulating what all these requirements actually mean in practice.
Overall, the package constitutes a major set of new regulatory requirements that will impact many types of institution, although it is notable that it does not include provisions on ‘green’ reductions to capital requirements for banks and insurers. It seems that a legislative pause for the industry to embed ‘business as usual’ is unlikely to be granted in the short term.