EU Drafts New Rules for Impact Investing
By Sunny Lewis
BRUSSELS, Belgium, January 16, 2019 (Maximpact.com News) – The Council of the European Union is taking steps to encourage financial companies to increase awareness of the impact of their investments on the environment by requiring them to disclose how they integrate environmental, social and governance factors in their investment decisions.
EU ambassadors December 19 endorsed the Council’s position on two proposals aiming at making finance greener and more in line with the objectives of the Paris agreement on climate change, which takes effect in 2020.
First, they approved a proposal introducing disclosure obligations on how financial companies integrate environmental, social and governance factors in their investment decisions.
They also endorsed a proposal creating a new category of financial benchmarks aimed at giving greater information on an investment portfolio’s carbon footprint.
“The EU is fully committed to achieving the targets set by the Paris Agreement. Cutting greenhouse gas emissions requires investment. It is crucial that capital markets pay their fair share in channelling funding towards projects and companies that contribute to making our economy more sustainable,” said Hartwig Löger, minister for finance of Austria, which then held the Council presidency.
Since January 1, the presidency has been held by Romania, which keeps it for six months.
Institutional investors, such as asset managers, pension funds or insurance companies, receive a mandate from their clients and beneficiaries to make investment decisions on their behalf.
Although these companies have to comply with strict legal requirements to ensure that they act in the best interest of their clients, rules on duties and information as regards the environmental and social impact of their investment decisions have not yet been defined.
The draft text proposes a harmonized EU approach to the integration of sustainability risks and opportunities into the procedures of institutional investors.
It requires them to disclose:
- the procedures they have in place to integrate environmental and social risks into their investment and advisory process;
- the extent to which those risks might have an impact on the profitability of the investment;
- where institutional investors claim to be pursuing a “green” investment strategy, information on how this strategy is implemented and the sustainability or climate impact of their products and portfolios.
The proposed regulation is intended to limit possible “greenwashing,” the risk that products and services marketed as sustainable or climate friendly claim to be more environmentally friendly than they really are.
The European Commission has called for a climate-neutral Europe by 2050.
On November 28, 2018, the Commission presented its strategic long-term vision for a prosperous, modern, competitive and climate-neutral economy by 2050.
The strategy shows how Europe can lead the way to climate neutrality by investing in realistic technological solutions, empowering citizens, and aligning action in key areas such as industrial policy, finance, or research, while ensuring social fairness for a just transition.
Following the invitations by the European Parliament and the European Council, the Commission’s vision for a climate-neutral future covers nearly all EU policies and is in line with the Paris Agreement’s objective to keep the global temperature increase to well below 2°Celsius and pursue efforts to keep it to 1.5°C above pre-industrial levels.
The disclosure plan is meant to help the EU to achieve its target for controlling global warming, for which the Commission estimates that €180 billion (US$205 billion) a year in additional investment will be needed for the next two decades.
An increasing number of investors seek to ensure that their investments have a positive impact on the environment. To do so, they take investment decisions based on the carbon footprint generated by the projects or assets they consider, using indices that reference or measure the performance of investment portfolios.
However, a wide variety of such indices currently exists, with different objectives and degrees of quality and integrity.
So, the Council supports the Commission’s proposal to provide a reliable tool to pursue low-carbon investment strategies by establishing a new category, made up of two types of financial benchmarks:
- low-carbon benchmarks, which aim to lower the carbon footprint of a standard investment portfolio.
- positive-carbon impact benchmarks, which have the more ambitious goal to select only components that contribute to attaining the 2°C set out in the Paris climate agreement.
“We want to establish an EU-wide classification system for sustainable activities, to provide common definitions for what is green and what is not. This is a ground-breaking step,” said EU Commission Vice President Valdis Dombrovskis, in charge of Euro and Social Dialogue, and also in charge of Financial Stability, Financial Services and Capital Markets Union.
He said it would be the first time the EU had developed a classification system for environmentally-friendly investments.
Dombrovskis told reporters, “Green does not necessarily mean risk-free.”
The European Parliament voted on its position on disclosure on November 9 and on low-carbon benchmarks December 13. Negotiations between the Council and the Parliament on the disclosure proposal are therefore ready to start.
Once disclosure provisions for sustainable investments and sustainability risks have been agreed at the EU level, the Commission has another set of rules ready to go.
On January 4, the Commission published draft rules on how investment firms and insurance distributors should take sustainability issues into account when providing advice to their clients.
The new draft rules are intended to help integrate Environmental, Social and Governance (ESG) considerations and preferences into investment advice and portfolio management, and into the distribution of insurance-based investment products.
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