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EC fires starting gun on development of ESG integration rules

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The European Commission has asked two of the EU’s financial supervisory bodies for technical advice on potential amendments to EU rules to require the integration of sustainability risks in investment decision-making. 

The advice is being sought in relation to so-called delegated acts that would amend or introduce new rules under EU legislation addressing asset managers, insurers, insurance distributors and investment advisers.

If accepted these rule changes would “explicitly require the integration of sustainability risks, i.e environmental, social and governance risks in the investment decision or advisory processes”.

The Commission also said the supervisory authorities should be aware that a delegated act could be adopted under IORP II, the recently revised EU pension fund directive, “once and if the related empowerment […] is in place”.

The request for technical advice was sent to the European Securities and Markets Authority (ESMA) and the EU supervisory authority for the insurance and occupational pension fund sector – EIOPA.

In a letter to the heads of the two institutions, Olivier Guersent, the Commission’s director general for financial stability, financial services and capital markets union, said he invited EIOPA and ESMA to “closely liaise with and consult each other in the preparation of their technical advices to ensure consistency across sectors”. He suggested that Commission staff be invited to join as observers the ESMA and EIOPA working groups that will prepare the technical advice.

According to the formal request itself they should provide advice on “how and where financial market participants are to integrate relevant sustainability risks within their business models and relevant procedures”. The Commission specifically referred to the areas of organisation requirements, operating conditions – in particular investment strategy and asset allocation, and risk management.

The advice should take into account the size, nature, scale and complexity of financial market participants’ activities, it said. 

The request for advice comes after the Commission at the end of May announced a batch of legislative proposals to implement its sustainable finance action plan. One of the proposals is for a “regulation on disclosures relating to sustainable investments and sustainability risks”.

At the time the Commission also said it was aimed at introducing “consistency and clarity” on how various financial market participants should integrate environmental, social and corporate governance (ESG) factors in their investment decision-making process.

Exact requirements would be specified through delegated acts that it would adopt at a later stage, the Commission added. Its proposal sought to amend the IORP II directive to allow for delegated acts. However, the politician responsible for leading the European Parliament’s response to the Commission’s proposal deleted this provision in his amendments to the Commission proposal .

The request for advice can be found here .

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