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EC to propose legislation ‘clarifying’ investor duties on sustainability

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The European Commission will put forward a legislative proposal to “clarify” investors’ duties regarding sustainability in May, it announced today.

The measure is one of several key actions that form a keenly anticipated and wide-ranging action plan on sustainable finance from the EU executive.

The plans are keeping with recommendations made by the High Level Expert Group (HLEG) that has been advising the Commission. Action on investor duties was recommended by the HLEG, with the Commission already having consulted on this last year. 

Today the Commission said institutional investors’ and asset managers’ duties on sustainability needed to be clarified because existing EU rules were not always clear or consistent. 

It wanted to clarify investors’ duties “to make sure they consider, in an appropriate manner, environmental, social and governance (ESG) issues in their investment decision process and are more transparent towards their clients”, it said.

The Commission also cited the outcome of a consultation it carried out in 2016, saying this “suggested that institutional investors and asset managers do not necessarily consider sustainability factors and risks within their financial decision-making but tend to focus rather on financial factors and risks with a primary aim to maximise returns in the short-term”.

Earth at night

The action plan is designed to create a sustainable economy and achieve social and environmental goals

This, according to the Commission, meant the investors might disregard or underestimate the long-term effects sustainability factors might have on the performance of their investments.

It also said there was also a lack of transparency on how investors considered sustainability factors in their investment decision-making processes, which meant “their clients may not get the full information they need to inform their investment decisions”.

The Commission cited the “unpredictable consequences of climate change and resource depletion” and the need for some €180bn of annual additional investment to achieve the EU’s climate change under the Paris agreement.

This was why it was “setting out a roadmap to boost the role of finance in achieving a well-performing economy that delivers on environmental and social goals as well”.

Presenting the sustainable finance action plan and other Capital Markets Union (CMU) measures today, Valdis Dombrovskis, vice-president responsible for financial stability, financial services and CMU, said the European Parliament and Council should now “accelerate” their work.

He referred to getting the measures “across the finish line” before the next European Parliament elections, which are set for late May.

Something for everyone?

Valdis Dombrovskis

Valdis Dombrovskis

In line with the HLEG’s final report, the Commission’s plan contains actions addressing a range of actors in the financial system. Dombrovskis today spoke about changing “culture and incentives” across the investment chain.

Besides the measure on investors’ duties, other actions in the plan include:

Establishing an EU taxonomy, or classification system

Essentially the lynchpin of the action plan, this is about definiing what are environmentally and socially sustainable activities and identifying areas in which investment could make the biggest impact “so that capital flows toward activities that contribute to sustainable development”. The Commission will present a legislative proposal on the principles and scope of an EU taxonomy in May.

Such a system would protect investors by “by avoiding risks of green-washing”, according to the Commission. It has published a call for applications from “technical experts” to form a group that will help prepare such a taxonomy, in addition to other tasks.

Creating standards and labels for green financial products such as green bonds

These would be based on the above taxonomy and “allow investors to identify investments that comply with green or low-carbon criteria”.

Tackling corporate reporting

The Commission said it would reinforce existing reporting requirements for issuers with regards to sustainability information. It would also amend guidelines on non-financial reporting and promote best practices, but said legislative changes may be required.

Introducing sustainability and capital requirements

The Commission previously mentioned reducing capital charges for banks if they financed sustainable activities or projects, but this idea of a “green supporting factor” met with strong opposition from some stakeholders who said it could weaken banks and potentially affect financial stability.

Under the final action plan, the Commission said it would “explore the feasibility” of recalibrating capital requirements for banks for sustainable investments when justified from a risk and financial stability perspective.

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