What are the proposals for new European regulation on investor duties?

‘Investment horizons and ESG rules must match end-client’ HLEG tells EU

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Hailed as the flagship policy recommendation from the High Level Expert Group on Sustainable Finance (HLEG), clarifying the role of ESG in investor duties is the second key proposal in its final report.
The Commission’s Vice President Valdis Dombrovskis said in December that the EU would “propose to integrate sustainability factors into investment mandates”, and the recommendation from HLEG details what the group wants that to look like. It asks the Commission to “explicitly link the duties of investors to the investment horizons and sustainability preferences of the individuals and institutions they serve”.

“Generally there’s a three- to five- year time horizon on your assets and investments, but the liabilities side looks more like 20/30 years” – Alecta’s Billing

Magnus Billing, CEO of Sweden’s largest pension fund, Alecta, was one of the members of HLEG focused on the investor duties recommendation. “If you look at pension funds and insurance companies, generally there’s a three- to five- year time horizon on your assets and investments, but the liabilities side looks more like 20/30 years or more,” he tells RI. “So, the investor duty recommendation is trying to align that by emphasising the need for the asset owner to ensure that it has a good grasp of what its beneficiaries’ interests are, and to integrate them into investment activities.”
HLEG has called for the creation of an “EU omnibus” (a single legislative proposal that has the power to effect multiple legislative proposals at the same time) on investor duties, to “ensure that this change takes place simultaneously across the entire investment chain”. The directives and regulation that currently relate to investor duties include IORP II, PEPP, MiFID II, Solvency II, UCITS and AIFMD. None of these, according to HLEG, currently contain sufficient content on sustainability, and therefore all should be covered by reforms.
However, not everyone in the market agrees. The European Commission launched a public consultation on the topic in December, which is said would form the basis of its actions on investor duties, along with the HLEG recommendations.
PensionsEurope, the industry body, submitted its response, which warned regulators to hold off on making further amendments to IORP II – the Institutions for Occupational Retirement Provision Directive – which will come into force early next year.
“It should be noted that the ESG provisions of the IORP II Directive have yet to be transposed into national law so their value has yet to be assessed. We therefore advise to assess their impact under the normal review provisions of the IORP II Directive.”
In response to HLEG’s final report, PensionsEurope reiterated its viewpoint. CEO Matti Leppälä said: “The new IORP II Directive is already very advanced and includes many new provisions on ESG, as part of risk management and investments. It would be advisable to first see the impact of these new rules before expanding them”.
But Billing says the time is now. “We’ve been given this unique opportunity, and we should make sure we use it to codify the sustainability obligations of all the most important players across the board.”
This will enable investors to “capture wider risks that are currently not captured in assessments,” he adds, citing current “short-sightedness in the actual investment work”. But it is not just about risk. “It will also enable investors to think more long term and identify the opportunities that will arise from this societal transformation that we’re seeing and that the EU is trying to achieve.”The proposed Omnibus would address asset allocation, investment strategies, risk management, governance and stewardship, the report says, and would “require that all participants in the investment chain proactively seek to understand the sustainability interests and preferences of their clients, members or beneficiaries.”
In practice, this would mean that asset owners would be obliged to consider ESG factors over the appropriate time frame, and reflect this in the mandates they give to asset managers, while asset managers would be “obliged to ask about the sustainability priorities and timeframe that the investment mandate or fund is being designed to serve” – and explain the risks and benefits of incorporating sustainability into strategies.
“It should also be clarified that stewardship of investments is a fundamental element of fulfilling these duties,” the report points out.
Notably, the recommendation states that clients’ and beneficiaries’ views should be actively sought and incorporated into investment decisions, “whether financially material or not” – a request that goes much further than most of the rhetoric around ESG so far, which focuses on materiality. A group of specialist NGOs including ShareAction, Frank Bold, Friends of the Earth Europe, CDP, WWF and Finance Watch published their own EU demands for sustainable finance recently, and even they only called for investment decisions to include ESG factors where they “are financially material”.
It’s another example of how ambitious the HLEG recommendations are, but it’s not clear how much of this will heeded by the EU. A legislative proposal dedicated to investor duties is in the pipeline for Spring, RI understands. Dombrovskis has already indicated that updated regulation would be aligned with what’s in the report, requiring sustainability to be “reflected in the duties that asset managers and institutional investors have towards those whose money they manage”.

“We really have to find the right way in each of our jurisdictions” – the French Treasury’s Boissinot

The UK investment community, which is currently in the midst of its own upheaval on fiduciary duty, is urging any new European regulation on the topic to be in alignment in order to avoid complications post-Brexit. UK laws are expected to be in place to clarify the need for ESG considerations in investment decisions by the end of the year, according to experts.
But elsewhere in Europe, member states are cautious about the prospect of a pan-European rule on investor duties. Speaking at a sustainable finance event held by the Commission in Brussels last year, Levin Holle, Director General for Financial market policy at Germany’s Ministry of Finance, said he had “not yet fully grasped whether there’s really a need to change the concept of fiduciary duty”.
“Risks and future business models of investments should always be analysed,” he said. “Rather than changing the concept of fiduciary duty, I would rather try to incorporate materially-relevant environmental risks into the assessment that needs to be done under the existing framework.”
At the same event, Jean Boissinot, the Director of financial stability at the French Treasury, said it was “important to disentangle the objective on one side and the specific discussion in a specific context on fiduciary duty on the other”.
“What we need is to make explicit what is expected from the asset managers vis-à-vis their investors, and institutional investors vis-à-vis their beneficiaries,” he said. But, he warned, “we really have to find the right way in each of our jurisdictions to be able to do that”.