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Sustainable Finance Action Plan - regulation memo
Sustainable Finance Action Plan - regulation memo
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Sustainable Finance Action Plan - regulation memo

26/06/2019

In 2015, the adoption of the United Nations (UN) 2030 Agenda for Sustainable Development and the Paris agreement marked a significant shift in global attitudes towards climate change and sustainability. On 8 March 2018, the European Commission (EC) published its Sustainable Finance Action Plan which aims to channel more funding to sustainable economic activities and firstly to activities that will mitigate the climate change or contribute to the adaptation to climate change.

About the Sustainable Finance Action Plan

In May 2018, a first legislative package was published by the EC which includes proposals for European Union (EU) taxonomy of sustainable economic activities, disclosure requirements on sustainability consideration for financial products and the definition of two low-carbon benchmarks.

The key initiatives of the EC Sustainable Finance Action Plan are:

  • Creating a EU classification (taxonomy) of environmentally sustainable economic activities as well as EU standards and green labels based on this EU taxonomy
  • Strengthening sustainability disclosures by companies
  • Taking into consideration:
    • Sustainability when defining  targeted investors of financial instruments
    • Investor’s environmental, social or governance preference when they are advised by investment firms and insurance distributors
    • Sustainability into risk management and disclosure for  institutional investors and asset managers
  • Incorporating sustainability in prudential requirements
  • Considering mandating credit rating agencies to explicitly integrate ESG factors into their assessment
  • Improving accounting rule-making

Scope

The action plan will introduce:

  • Through the EU taxonomy regulation, a list of economic activities that substantially contribute to the six environmental objectives, the two first being climate change mitigation and adaptation. To be marketed as “environmentally sustainable”, a financial product would need to invest  a proportion of its holdings in taxonomy compliant economic activities, higher than a certain threshold
  • More transparency on sustainability consideration for: 
    • Companies: by Q2 2019, the Commission will revise the guidelines on non-financial information building on the metrics developed by the Commission Technical Expert Group (TEG) on sustainable finance. The EC will also publish its conclusion on the fitness of EU legislation on EU corporate reporting including the evaluation of sustainability reporting requirement
    • Manufacturers of financial products (insurers, asset managers, pension funds, portfolio managers): they will be subject to new disclosure requirements on sustainability under  a regulation for disclosure on sustainable investments
    • Administrators of ESG benchmarks: they will have to disclose their methodology. The delegated acts under the Benchmark Regulation will define harmonised methodologies for two types of low carbon benchmarks
  • The obligation for insurers, asset managers, investment firms, pensions funds - through amendments of delegated acts under the UCITS Directive, AIFMD, MiFID II, Solvency II and the Insurance Distribution Directive (IDD)- to consider sustainability risks as part of their risk management process
  • The obligation, for investment firms and distributors of insurance-based products, to ask their investors their ESG preferences when performing suitability assessment. 
  • ESG consideration in prudential regulation for banks and insurers

Industry implications

Many of the regulatory initiatives of the first legislative package are progressing simultaneously and their structuring concept definitions are still being discussed by the policymakers particularly the use of the taxonomy. Therefore, it is still not clear whether financial products that invest in environmentally friendly economic activities that are not EU taxonomy compliant will still qualify as a financial product with ESG characteristics.

Although corporates, institutional investors and banks welcome the sustainable finance action plan, they are concerned by potential costs to provide or to access necessary data to comply with new requirements on transparency and risk management. Banks are also concerned on whether incorporating sustainability in prudential requirements should translate by the introduction of a Green Supporting Factor, that would decrease capital charges for green assets, or, on the contrary, the introduction of Brown Penalty that would increase capital charges for high carbon assets.

BNP Paribas Securities Services’ view

For now investors tend to invest in pure green activities by lack of technical criteria when it comes to environmentally sustainable funds. For example, they tend not to invest in gas, or automobiles in any of their green funds. The proposed taxonomy should help investors identify which technologies/ways of conducting an activity are good for the transitioning to a more sustainable economy and will broaden the scope of investment options. The taxonomy’s technical criteria should allow for the inclusion of economic activities that may continue to have negative impacts on the environment, but that are on course to substantially reduce them. This will help some activities to move towards greener pathways.

Key dates

24 May 2018 - Publication by the EC of the legislative package

7 December 2018 - TEG published its first draft taxonomy

19 December 2018 - the European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA) published consultations on the integration of sustainability factors in delegated acts of  the UCITS Directive, AIFMD, MiFID II, Solvency II, IDD

April 2019 - Technical advice of EIOPA and ESMA on integration of sustainability factors is expected

June 2019 - TEG report on taxonomy for economic activities that contributes to climate change mitigation and adaptation

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