The European Commission (EC) is planning to ask EIOPA to assess the potential need to introduce the notion of double materiality in the “pension framework”, according to a leaked draft of the EU executive’s new sustainable finance strategy.
The EU pension fund supervisor’s analysis would also consider the potential need to broaden the concept of “the long-term best interests of members and beneficiaries,” states an overview of the draft strategy seen by IPE.
“The aim would be to ensure that the framework better reflects members’ and beneficiaries’ sustainability preferences and broader societal and environmental goals,” said the Commission.
“More broadly, in collaboration with the [European Supervisory Authorities], the Commission will consider and assess further environmental measures to enable all relevant financial market participants and advisers to consider sustainability impacts of their investment decisions on a systematic basis,” it added.
The draft EC documents also refered to the EIOPA analysis being to “assess whether the prudent person rule should be clarified and/or explore possible avenues to require the integration of sustainability impacts in investment decision”.
Double materiality captures the notion of environmental, social and governance (ESG) factors affecting investment as well as being affected by investment.
In the EC’s words: ”The concept of double materiality consists of the systematic integration of both outside-in and inside-out ESG risks by financial actors across financial decision-making processes.”
EIOPA has previously floated a change to the EU pension fund legislation, IORP II, to mandate pension funds to take into account the long-term environmental and/or social impact of their investment decisions.
Supporting transition finance
Publication of the official new sustainable finance strategy, a follow-up of the 2018 action plan, is anticipated for 6 July.
In the leaked draft communication, the EC said a complementary strategy to the 2018 plan is needed because all the actions laid out then had not yet been delivered, and “our understanding of what is needed to meet the sustainability goals has evolved, and the global context has changed”.
In the EC’s framing in the draft documents, the new strategy identifies four main areas where additional actions are needed for the financial system to fully support the transition towards sustainability.
In connection with the first area, “financing the path of the real economy towards sustainability”, the leaked strategy documents revealed a plan focussed on supporting transition finance, building on the recommendations provided by the expert group advising the EC.
“A more supportive framework is needed to address the challenge of financing the urgent transition of activities that currently are not on the path to contribute to the EU’s climate neutrality objectives,” read the leaked draft communication document.
Steps mentioned in this context include extending the EU taxonomy framework and working on further bond labels such as for transition or sustainability-linked bonds – the EC will adopt a legislative proposal for a European green bond standard next Tuesday, according to the draft document.
“While all companies, issuers and investors can use the EU Taxonomy to green their activities and portfolios, the current framework could better recognise investments for intermediary steps on the pathway towards sustainability,” the draft communication document stated.
“Such investments may significantly reduce harmful climate and environmental impacts.”
No reference was made to a “brown taxonomy” in the draft documents, but they did relay a plan for the EC, as required by the taxonomy regulation, to produce a report on economic activities that significantly harm environmental sustainability.
The other areas the EC is targeting for additional action were described as being about “inclusiveness”, the financial sector’s double materiality, and fostering an international consensus for an ambitious sustainable finance agenda.
On the topic of ESG market research and ratings, the leaked draft communication said the EC will organise a targeted public consultation by Q4 of this year at the latest, and, subject to an impact assessment, “will come forward with an initiative to strengthen the reliability and comparability of ESG ratings” by Q1 2023.
ESG ratings were one of many topics covered in the Commission’s consultation about a new sustainable finance strategy last year.
Under the double materiality heading, the draft leaked documents also stated that the Commission will support investors’ engagement activities to hold investee companies accountable for aligning their business strategies and activities with EU sustainability goals.
The EC will review relevant frameworks relating to investors’ stewardship and engagement activities, including the Shareholder Rights Directive II.