The European Commission put forward a new set of proposals on sustainable finance Thursday, hoping more sustainable investments from the EU financial sector can lead the way to a greener economy.
The EU executive says involvement of the financial sector will greatly boost efforts to reduce Europe’s environmental footprint ‘while enhancing the sustainability and competitiveness of the EU economy’.
“We should put our money into projects that are compatible with our decarbonisation objectives and the fight against climate change,” said the Commission’s financial services vice-president Valdis Dombrovskis: “This is important for the environment and the economy, but also for financial stability. Between 2007 and 2016, economic losses from extreme weather disasters rose by 86%.” The proposals were, he added, about “harnessing the vast power of capital markets in the fight against climate change and promoting sustainability.”
The Commission believes the EU needs around EUR 180 billion a year of additional investments in energy efficiency and renewable energy to achieve its 2030 climate targets. “Today’s proposals will increase transparency of sustainable finance and the investment opportunities it offers, so that investors have reliable information available to enable the transition to a low-carbon, resource-efficient and circular economy,” said vice-president for jobs and growth Jyrki Katainen.
More investments will be channelled into sustainable activities thanks to new rules that define the criteria to determine whether an economic activity is environmentally-sustainable. This harmonised EU-wide classification system – or ‘taxonomy’ – will particularly help investors who often do not have enough information about what is green and what is not. All financial entities that manage investments on behalf of their clients or beneficiaries will now have to inform them about how their activities are impacting the planet or their local environment. In so doing, these rules will give more choice to investors who wish to invest in the future of the planet while earning a return.
Key features of the measures
- A unified EU classification system (‘taxonomy’): The proposal sets harmonised criteria for determining whether an economic activity is environmentally-sustainable. Step by step, the Commission will identify activities which qualify as ‘sustainable’, taking into account existing market practices and initiatives and drawing on the advice of a technical expert group that is currently being set up. This should provide economic actors and investors with clarity on which activities are considered sustainable so they take more informed decisions. It may serve as the basis for the future establishment of standards and labels for sustainable financial products, as announced in the Commission Action Plan on Sustainable Finance.
- Investors’ duties and disclosures: The proposed Regulation will introduce consistency and clarity on how institutional investors, such as asset managers, insurance companies, pension funds, or investment advisors should integrate environmental, social and governance (ESG) factors in their investment decision-making process. Exact requirements will be further specified through Delegated Acts, which will be adopted by the Commission at a later stage. In addition, those asset managers and institutional investors would have to demonstrate how their investments are aligned with ESG objectives and disclose how they comply with these duties.
- Low-carbon benchmarks: The proposed ruleswill create a new category of benchmarks, comprising the low-carbon benchmark or “decarbonised” version of standard indices and the positive-carbon impact benchmarks. This new market standard should reflect companies’ carbon footprint and give investors greater information on an investment portfolio’s carbon footprint. While the low-carbon benchmark would be based on a standard ‘decarbonising’ benchmark, the positive-carbon impact benchmark would allow an investment portfolio to be better aligned with the Paris agreement objective of limiting global warming to below 2° C.
- Better to advice to clients on sustainability: The Commission has launched a consultation to assess how best to include ESG considerations into the advice that investment firms and insurance distributors offer to individual clients. The aim is to amend Delegated Acts under the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive. When assessing if an investment product meets their clients’ needs, firms should also consider the sustainability preferences of each client, according to the proposed rules. This should help a broader range of investors access sustainable investments.