Focus on Green Finance – The European Union Action Plan – Mandates Being Put in Place for Fiduciaries

The European Union adopted a Sustainable Finance Action Plan in May 2018; the package of measures included a proposal for a regulation to establish a framework to facilitate sustainable investment.  The aim is to create a unified classification system or taxonomy on what could be considered to be “an environmentally-sustainable economic opportunity”.

Also in the plan:  a proposal for a regulation on disclosures related to sustainable investment and sustainable risks to require financial sector players to integrate ESG in their risk processes and decision-making as part of their fiduciary duties.

The action plan also calls for a regulation to amend the benchmark regulation by creating a new category of benchmarks for low-carbon and positive-carbon impacts (this would provide investors with better information on the carbon footprint of their investments).

The latest move in the action plan is the mandating of disclosure by money managers, insurance companies, pension funds and investment advisors in how these financial sector players are integrating ESG factor in their portfolios and disclosing the details to their beneficiaries, savers, investors, and advisors.

The financial sector fiduciary organizations will have to disclose how certain investments of theirs might cause damage to the planet, such as polluting water (think: mining companies, oil & gas companies, chemical companies, and others) and how an investment might damage biodiversity.

Implementation of the European Commission plan requires amending the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive, and other directives or by adopting new “delegating acts” under the directives.

Also to be expected:  establishing an EU label for “green” financial products, those that comply with green or low-carbon criteria.

Two years ago the EU adopted ESG disclosure policies for public companies (the EU Directive for Non-Financial Disclosures and an Accounting Directive that was adopted by all 28 states); this corporate reporting directive could be strengthened as part of the action plan to assure that companies are providing the right information to investors.

All of this is to further ensure that the financial sector players invest more responsibly, said Valdis Dombrovskis, the EU vice president responsible for financial stability, financial services and the Capital Markets Union (CMU) in talking with Editor Paulina Pielichata of Pensions & Investments.  The CMU is a plan of the European Commission to mobilize capital in Europe and channel it to companies and infrastructure projects to expand and create jobs, part of the vision of creating a single market for capital in the EU.

She had written back in June 2018 after the announcement of the action plan that disclosure of sustainability and low-carbon attributes of investment strategies will soon be standardized as the European Commission worked on creating better transparency for those strategies for moving toward a lower-carbon economy. 

This is just the introduction of G&A's Sustainability Highlights newsletter this week. Click here to view full issue.