Sustainable Finance coming to the Core of the Investment Community using ESG for Socially Responsible Investments:

The European Commission has published its package of proposals in relation sustainable finance.  It is encouraging responses to the proposals.

There are four proposals:

1. A proposed regulation on disclosure relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341.  This proposed regulation would apply to AIFMs, UCITS management companies and MiFID investment firms (among others).  It appears that Articles 3, 4, 8 and 9 would apply to all firms in scope and, if the firm is offering services or products with sustainability targets, Articles 5-7 will also apply.  Please note that are further delegated acts to be proposed in the future (timing uncertain but the fact sheet  says 2019) to govern the duties owed toward investors/beneficiaries with regard to ESG factors (see section 5.4 of the impact statement for a description of their preferred option).

For asset management firms, the requirements include:

A. Publication of written policies on the integration of sustainability risks in the investment decision-making process on their websites (Article 3);

B. Including descriptions in the pre-contractual disclosure to clients/investors of:

a. the procedures and conditions applied for integrating sustainability risks in investment decisions;

b. the extent to which sustainability risks are expected to have a relevant impact on the returns of the financial products made available;

c. how the remuneration policies of financial market participants are consistent with the integration of sustainability risks and are in line, where relevant, with the sustainable investment target of the financial product. (Article 4);

C. Including disclosures regarding reference benchmarks (or lack thereof and, if a target applies, alternative measurements against targets) in the pre-contractual disclosure to clients/investors (Article 5).  This article also empowers the ESAs to regulatory technical standards to specify the details of the presentation and content of the information to be disclosed;

D. Website disclosures related to products and services featuring sustainability targets, including a description of the sustainable investment target and information on the methodologies used to assess, measure and monitor the impact of the sustainable investments selected for the financial product, including its data sources, screening criteria for the underlying assets and the relevant sustainability indicators used to measure the overall sustainable impact of the financial product (Article 6). This article also empowers the ESAs to regulatory technical standards to specify the details of the presentation and content of the information to be disclosed;

E. Financial statement disclosures for products featuring a sustainability target (Article 7). This article also empowers the ESAs to regulatory technical standards to specify the details of the presentation and content of the information to be disclosed;

F. Keeping up to date the website disclosures required by Articles 3 and 6 (Article 8)

G. Ensuring that marketing communications do not contradict the information disclosed pursuant to the Regulation (Article 9).  This article also empowers the ESAs to draft implementing technical standards to determine the standard presentation of information on sustainable investments.

2. A proposed regulation on the establishment of a framework to facilitate sustainable investment. This regulation would (1) establish criteria for determining whether an economic activity is environmentally sustainable for the purposes of establishing the degree of environmental sustainability of an investment and (2) apply to (i) measures adopted by Member States or by the Union setting out any requirements on market actors in respect of financial products or corporate bonds that are marketed as environmentally sustainable and (ii) “financial market participants” (defined here by reference to the definition in the disclosure regulation discussed above) offering financial products as environmentally sustainable investments or as investments having similar characteristics.

3. A proposed regulation amending Regulation (EU) 2016/1011 on low carbon benchmarks and positive carbon impact benchmarks. This proposed regulation introduces new categories of benchmarks, namely the ‘low-carbon benchmark’ and the ‘positive carbon impact benchmark’ (Article 1(1) amending Article 3(1) of the Benchmark regulation), as well as the key requirements applicable to the methodologies for such benchmarks (Article 1(3) creating a new Chapter 3A in the Benchmark regulation) which will be detailed in a delegated act. A newly introduced Annex III lays down the key requirements for the methodology for low-carbon and positive carbon impact benchmarks by listing the elements that administrators have to disclose and the procedure to be followed for amending their methodology. Finally, administrators of benchmarks which pursue ESG objectives would have to provide an explanation of how their methodology reflect the ESG factors (Article 1(4)). Unlike the previous 2 proposals, the commission is seeking feedback, open until 19 July.

4. A proposed commission delegated regulation …/… amending Regulation (EU) 2017/565 supplementing Directive 2014/65/EU (MifID II). This proposed level 2 regulation applies to Mifid-licensed firms and aims at ensuring that financial advisors and portfolio managers:

  • carry out a mandatory assessment of ESG preferences of their clients in a questionnaire addressed to them (Article 1(d) amending article 47(3) of the current level 2 regulation)
  • take these ESG preferences into account in the selection process of the financial products that are offered to these clients (Article 1(4) and (5) amending article 52 and 54 of the current level 2 regulation)
  • provide ex-ante information disclosure regarding ESG factors before the provision of portfolio management services. (Article 1(3) amending article 48(1) of the current level 2 regulation)
  • prepare a report to the retail client that explains how the recommendations meets his investment objectives, risk profile, capacity for loss bearing and ESG preferences (ex-post information disclosure). (article 1(4)(d) amending Article 54(12)).

The Commission seeks feedback on this proposal – deadline is 21 June 2018.