EU gets seriously sustainable about finance: the new legislation explained
EU gets seriously sustainable about finance
The EU has shown its intent to become a world leader in sustainable finance according to its legislative proposals. What are the immediate impacts for those in the financial marketplace?
The EU has not wasted any time following the recommendations of the High-Level Expert Group on sustainable finance, which launched its report in end-January 2018. On 24 May 2018, the EU published its first batch of legislative proposals on sustainable finance, the first concrete steps of its bold action plan in this area, published earlier in May. With this action plan, the EU has shown its intent to become a world leader in sustainable finance.
With all this recent activity, let us examine the immediate impacts for those in the financial marketplace.
The main actions proposed by the EU
The mainstreaming of sustainability in finance is to be effected via ten specific actions:
1. Establishing an EU classification system for sustainable activities
2. Creating standards and labels for green financial products
3. Fostering investment in sustainable projects
4. Incorporating sustainability when providing financial advice
5. Developing sustainability benchmarks
6. Better integrating sustainability in ratings and market research
7. Clarifying duties of institutional investors and asset managers
8. Incorporating sustainability in prudential requirements
9. Strengthening sustainability disclosure and accounting rule-making
10. Fostering sustainable corporate governance and attenuating short-termism in capital markets
Given its broad application, this action plan will undoubtedly affect the entire financial market, from banking and asset management to insurance and pension funds. The impact will first and foremost be felt through imminent legislative changes, both through amendments to existing legislation and through new regulations and standards.
The action plan strongly encourages responsible investment, which affects the way capital is allocated in the investment universe. From corporates point of view, ESG filters impacts on the cost of capital. It is preferable to position your company in the typical eligible investment universe of investors.
Expected changes to existing regulation
The new action plan puts the interests of potential investors in the centre. To ensure that sustainability factors are in compliance with investors’ preferences, the EU will amend MiFID II and IDD regulatory frameworks for banks and insurers respectively. Additionally, the Commission will specify the content of the prospectus for green bonds issuance, to guarantee that investors receive the needed information.
To further enhance sustainability considerations in banking sector, the Commission will also explore the feasibility of the inclusion of climate-related risks in risk management functions and the potential calibration of banks’ capital requirements.
As mentioned above, the first legislation package of the action plan was released in May. It contains proposals for three new regulations:
- A regulation on the establishment of a taxonomy for sustainable investments and products: this regulation would establish the conditions and framework to gradually create a unified classification system (“taxonomy”) for what can be considered an environmentally sustainable economic activity. This is the first and essential step in the efforts to channel investments into sustainable activities.
- A regulation on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341: this regulation would introduce disclosure obligations on how institutional investors and asset managers integrate environmental, social, and governance (ESG) factors into their risk processes. Requirements to integrate ESG factors into investment decision-making processes, as part of their duties towards investors and beneficiaries, will be further specified through delegated acts.
- A regulation amending benchmark regulation: this amendment would create a category of benchmarks comprising low-carbon and positive carbon impact levels, providing investors with better information on the carbon footprint of their investments.
In addition, the Commission is, from 24 May to 21 June, seeking feedback on amendments to delegated acts under:
- the Markets in Financial Instruments Directive (MiFID II)
- the Insurance Distribution Directive (IDD) — specifically on whether to include ESG considerations in the advice that investment firms and insurance distributors must offer to individual clients
The future of sustainable finance is here! The EU’s vision for sustainable growth is impressive, and means several important regulatory changes with wide-ranging impacts. To keep up with the pace, finance market members should be as proactive as possible.
KPMG’s network of professionals within responsible investment and sustainable finance will keep a close eye on the EU’s further actions and new developments.
Julien Ganter, Partner, KPMG Luxembourg
Laetitia Hamon, Senior Manager, KPMG Luxembourg
Tomas Otterström, Global Service Lead, Responsible Investment Services, KPMG
Riikka Sievänen, PhD, Responsible Investment WG Lead, KPMG
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