On Thursday 24 May, the European Commission announced its first three legislative proposals to complete its action plan on ‘sustainable’ finance (see EUROPE 11977).
Presenting these new initiatives to the press, the European Commissioner for Financial Services, Valdis Dombrovskis, stressed the urgent need to act in this area. “The Titanic couldn't escape the iceberg at the last minute and we will soon be in a similar situation. We must not wait for the last minute, but act now”, he said.
First step towards taxonomy taken
In a first proposed regulation, the Commission lays the foundation for the future taxonomy and prepares for it to be included in Community law. The aim is to give the EU common, clear language and avoid 'greenwashing', the practice of selling a financial product as ‘sustainable’ when in actual fact, it does not correspond to basic environmental standards.
To do this, the Commission has set six environmental objectives: - attenuating climate change and adapting to climate change; - the sustainable use and protection of water and marine resources; - the transition to a circular economy; - waste prevention and recycling; - pollution prevention and control, and; - protection of healthy ecosystems.
This will mean that in order to be considered sustainable, economic activities in which to invest should make a substantial contribution to achieving at least one of the six targets agreed upon. They should also be carried out in full respect of social guarantees and minimum governance standards.
By virtue of the future taxonomy, a town planning application could be described as ecological on the basis of its energy efficiency or share of recycled construction materials used, Dombrovskis explained.
However, the text only lays down the principles and the general scope of the future taxonomy. At a later stage, the Commission will use delegated acts to establish the technical criteria on the basis of which it will be possible to determine whether, and to what extent, an economic activity is ecological and sustainable.
Furthermore, the Commission intends to start with the most urgent issue, climate change mitigation and adaptation, in 2019, before progressively moving to the other objectives between 2019 and 2022.
In future, the scope of application of the taxonomy could be extended to social activities, a European official told us.
The proposal is available at: https://bit.ly/2knZsER .
Obligations for institutional investors
In a second proposed regulation, the Commission clarifies the way in which institutional investors (asset managers, insurance companies, pension funds) must include environmental, social and governance (ESG) factors in their investment decision-making.
The Commission proposal also requires the disclosure of procedures set in place by the financial players to include ‘ESG’ risks in their investment and advisory process, and to provide information on how these risks may have an impact on the profit’s yield or service provided.
Again, the Commission will lay down specific requirements through delegated acts to be adopted in 2019.
The proposal is available at: https://bit.ly/2GJHaGQ .
A new category of benchmarks
To help investors compare the carbon footprint of investors, the Commission has issued a third legislative text in which it proposes a new category of benchmarks including: - the benchmark corresponding to a low carbon intensity, or the “decarbonised” version of standard benchmarks; and - a benchmark corresponding to a positive carbon balance.
The low-carbon benchmark would be based on a standard decarbonisation benchmark. The benchmark corresponding to a positive carbon balance would help an investment portfolio to line itself up on the objective set out in the Paris Climate Agreement.
The aim, once again, is to provide the EU with a common methodology, but without being too prescriptive, a European official explained.
The proposal is available at: https://bit.ly/2Lras0C .
On the same day, the Commission also submitted for public consultation two proposed changes to the delegated act implementing the directive on the financial instrument markets (MiFID II) and the insurance distribution directive, to include 'ESG' criteria in the advisory services provided by investment companies and insurance distributors.
The rules proposed also provide for an obligation on businesses to take account of their customers’ preferences in terms of sustainability when assessing whether an investment product meets the customers’ needs.
Initial reactions were not slow to come in, particularly from the European Parliament which, along with the Council of the EU, will be asked to take a position on the proposals. “By postponing the addition of a social component, the Commission sends the wrong message to Europeans”, said Pervenche Berès (S&D, France). (Original version in French by Marion Fontana)