The EU Commission, following the publication of its Sustainable Finance Action Plan in March 2018, published on May 24th 2018 the following legislative proposals: (i) proposal for a regulation on the establishment of a framework to facilitate sustainable investments (the “Taxonomy Proposal”), (ii) proposal for a regulation on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341 (the “ESG Risk Proposal”), (iii) proposal for a regulation amending Regulation (EU) 2016/1011 on low carbon benchmarks and positive carbon impact benchmarks (the “Benchmark Proposal”) and (iv) proposal for a regulation amending certain MiFID II Level 2 measures (the “MiFID Amendments”).
The aim of these proposals is to place Environmental, Social and Governance (“ESG”) considerations at the heart of the investment decision making process by ensuring that financial market participants (such as UCITS management companies and AIFMs) integrate ESG considerations into their internal processes.
The Taxonomy Proposal identifies which and to what degree economic activities can be considered environmentally sustainable for the purposes of establishing the degree of environmental sustainability of an investment. It will apply to any financial products or corporate bonds that are marketed as environmentally sustainable as well as financial market participants that offer financial products as environmentally sustainable investments.
The degree to which an investment can be considered environmentally sustainable is assessed against whether the related economic activity meets certain criteria including whether it contributes to the following environmental objectives:
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy, waste prevention and recycling
- Pollution prevention and control
- Protection of healthy eco-systems
The aim of this proposal is not to establish a label for sustainable financial products but to provide a framework to set out the criteria that need to be taken into account when setting up such labels.
ESG Risk Proposal
With the ESG Risk Proposal, the Commission aims to create a harmonised approach to integrating consideration of ESG risks into the investment decision-making process. The draft proposal lays down harmonised rules on the transparency to be applied by financial market participants, insurance intermediaries and investment firms on the integration of sustainability risks in the investment decision-making process or advisory process and the transparency of financial products that have as their targets sustainable investments. Financial market participants include, inter alia, UCITS management companies, AIFMs and managers of EuVECAs or EuSEFs.
Such financial market participants shall publish written policies on the integration of sustainability risks in the investment decision-making process on their websites and shall include certain information relating thereto in pre-contractual disclosures such as in, for example, a UCITS prospectus. Where a financial product has as its target sustainable investments, certain additional pre contractual information will be required.
The Benchmark Proposal relates to the creation of two new benchmarks by the Commission; (i) the low carbon benchmark, which would cause underlying stocks to be selected on account of their reduced carbon emissions when compared to stocks constituting a standard benchmark and (ii) the positive-carbon impact benchmark, which has underlying stocks selected on account of their carbon emission savings exceeding the stock’s residual carbon footprint.
The MiFID Amendment proposes to amend Regulation 2017/565 supplementing MiFID II in order to require investment firms providing investment advice and investment management as part of their client suitability assessment, to question clients on their ESG preferences and take these answers into account when advising them.