The EU is getting closer to disclosure rules on sustainable finance

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The EU is getting closer to disclosure rules on sustainable finance

14 March 2019

Regulatory News Alert

Context and objectives

At the very end of February 2019, the EU reached a political agreement on a new generation of low-carbon benchmarks. In addition, on 7 March, the European Parliament and Member States established another preliminary agreement on sustainable investments and sustainability risks. The new regulation introduces the disclosure obligations on how financial companies integrate the environmental, social and governance factors in their investment decisions.

As an integral part of the series of legislative measures, which follows the EU Action Plan on Financing Sustainable Growth presented by the Commission in May 2018, the purpose of these newly agreed measures is to strengthen and improve the disclosure of information by manufacturers of financial products and financial advisors towards end-investors.  

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Integrating sustainability risks and opportunities into the procedures of institutional investors

The financial system is no exception in the EU’s efforts to achieve more sustainable growth. Re-orienting private capital to more sustainable investments requires a comprehensive knowledge of how the financial system works. This is necessary if the EU is to develop more sustainable economic growth, ensure the stability of the financial system, and foster more transparency and long-termism in the economy.

In order to encourage investors to be more aware of the impact of their business on the environment, the European Parliament and the European Council agreed that the new regulation would set out:

  • How financial market participants and financial advisors must integrate environmental, social or governance (ESG) risks and opportunities into their processes, as part of their duty to act in the best interest of clients
  • How those financial market participants should inform investors about their compliance with the integration of ESG risks and opportunities
  • To what extent those risks may have on the profitability of the investment
  • Where institutional investors claim to be pursuing a "green" investment strategy, information on how its adverse impact on ESG matters, such as in assets that pollute water or devastate bio-diversity, to ensure the sustainability of investments.

Three main pillars of the new regulation

The new regulation aims to define rules on duties and information in regards to the environmental and social impact of investment decisions from institutional investors such as asset managers or insurance companies, who receive a mandate from their clients and beneficiaries to make investment decisions on their behalf. Specifically, three main pillars of these new rules are:

  • Limit of possible “greenwashing”: elimination of unsubstantiated or misleading claims about sustainability characteristics and benefits of an investment product. For example, the risk that products and services which are marketed as sustainable or climate friendly, do not meet the sustainability/climate objectives claimed to be pursued
  • Regulatory neutrality: a disclosure toolbox to be applied in the same manner by different financial market operators. The three European Supervisory Authorities (ESAs), and in particular the Joint Committee of the Authorities, will ensure further convergence and harmonization of disclosures in all the sectors concerned
  • Level playing field: the regulation covers the following financial services sectors: 
    • Investment funds
    • Insurance based investment products
    • Individual portfolio management
    • Both insurance and investment advice.

Next steps

The political agreement will be submitted to EU ambassadors for endorsement. It will then undergo a legal linguistic revision. Parliament and Council will be called upon to adopt the proposed regulation at first reading.

The Commission is also working with the co-legislators with the objective to reach an agreement on the remaining part of the legislative package under the EU's 2030 sustainable development agenda and the carbon neutrality agenda. A proposal to establish a unified EU classification system ('taxonomy') of sustainable economic activities is in process.
 

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Contacts

Vincent Gouverneur
Partner – EMEA Investment Management Leader
Tel: +352 45145 2451
vgouverneur@deloitte.lu

Pascal Martino
Partner – Banking Leader
Tel: +352 45145 2119
pamartino@deloitte.lu

Simon Ramos
Partner – IM Advisory & Consulting Leader
Tel: +352 45145 2702
siramos@deloitte.lu

Benoit Sauvage
Director – RegWatch, Strategy & Consulting
Tel: +352 45145 4220
bsauvage@deloitte.lu

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