With legislative proposals on sustainable finance and regulatory pronouncements that stress testing exercises should take full account of climate change risks, this topic is now firmly in the regulatory mainstream.
In May 2018, the European Commission issued a legislative package on sustainable finance, aimed at asset managers, investment funds, investing institutions (including insurance companies and pension funds) and intermediaries. It includes:
See KPMG alert: EU strategy on sustainable finance for more details. The regulation on low-carbon benchmarks is already at “trilogue” stage (discussions between the European Parliament, Council and Commission), but the core Taxonomy regulation is progressing much more slowly. It remains to be seen whether the full package will be agreed before the European Parliamentary elections in May, despite the attendant pressures to finalize as many outstanding proposals as possible.
The European Insurance and Occupational Pensions Authority (EIOPA) is consulting until 30 January 2019 on the integration of sustainability risks and factors in Level 2 regulations under IDD and the Solvency II Directive. And the European Securities and Markets Authority (ESMA) is consulting until 19 March 2019 on:
Meanwhile, the Commission issued on 4 January 2019 draft amendments to the IDD and MiFID II Level 2 Regulations to provide the legal basis for how ESG considerations must be taken in account in advice given by investment firms and insurance intermediaries. The rules will come into play only when the fourth element of the main legislative package has been agreed.
ESG considerations are extending into other legislative proposals, too. We understand that the trilogue on revisions to the Capital Requirements Regulation (CRR2) may be finalized soon and may lead to:
Meanwhile, there is already increasing pressure for banks and insurers to incorporate the full panoply of climate change risks in their stress testing exercises. EIOPA is to deliver by 30 April 2019 recommendations on how existing regulatory frameworks might incorporate sustainability risks and factors, and an opinion on the impact of Solvency II on insurers' sustainable investment and underwriting activities.
National regulators are also increasingly focused on the issue. The UK's Prudential Regulatory Authority, for example, is consulting on its expectations for regulated firms to draw up credible plans to protect themselves from financial risks associated with climate change. Firms will need to embed climate change within the existing governance framework and assign board-level accountability for oversight. CROs will need to consider long-term scenario testing to inform the firm's strategic response to climate change and build climate change risk into risk management processes.
It is clear that this topic is now firmly on the regulatory agenda. Until the various new rules are finalized, the impact on regulated firms and their clients cannot be precisely calibrated. It is certain, though, that regulatory and client pressures will be at the forefront throughout 2019 and beyond. Firms will need to incorporate ESG considerations across their business. For further information, please visit the KPMG Global Sustainability Institute.
This article was originally published in Horizons: The outlook for financial services regulation (PDF 1.1 MB) in January 2019.