EU moves closer to legal reporting on sustainability risks by investors, banks and insurers

Investors, banks and insurers in Europe are one step closer to being legally required to disclose their sustainability risks, following a European Parliament vote yesterday, in what observers say could be a major development for formal ESG reporting. The ECON Committee of the European Parliament – a group of MEPs that oversee financial services – approved the first of the European Commission’s legislative proposals in a vote in Brussels on Monday. European Parliament Rapporteur, Paul Tang, MEP, took forward the proposal – first outlined in the spring – during the summer months. Tang made a series of amendments to the bill before putting it before MEPs for further feedback. The final proposal is complex, but essentially requires huge swathes of the market – including providers of occupational pensions, hedge funds, mutual funds and insurance-based insurance products – to show that sustainability risks are considered and disclosed in a formal, prescribed way, and published on their company websites and possibly in their annual reports.
In addition, the legislative proposal includes a section on IORP II (the Directive on Institutions for Occupational Retirement Provision). The Commission is seeking to amend IORP II – developed before the EU’s sustainability agenda really took shape – to enable it to amend a slew of relevant regulation on investor duties, with a view to bolstering expectations around ESG.
“This is really quite big,” said Eleni Choidas, European Policy Manager at NGO ShareAction. “It’s going to effect a wide scope of the market, from insurers to pensions to banks.”
There has been disagreement on which banking activities should be subject to the legislation. For example, Tang added corporate lending to the list, but this was removed again during the parliamentary negotiation and lobbying stage and will now only apply to banks’ asset management and advisory businesses. The regulation has always excluded life insurance activities.Among other final amendments is the inclusion of voting disclosure in line with the recent Shareholder Rights Directive currently being transposed by EU member states. The document also requires clearer definitions of sustainability risk, including impact and long-term risks rather than just short-term financially material factors. It also features an updated definition of sustainable investment to include a ‘no harm’ approach across both social and environmental objectives.
“There is also a general reference to the need for due diligence in order to comply with this legislation,” Choidis told RI, explaining that the original proposal could have been interpreted as only asking for disclosure where the information is already available to the investor: “Now it’s clear that investors must have in place adequate due diligence to capture this information in the first place, rather than just offering what they happen to have already. That’s a really positive development.”
Although yesterday’s vote is a major step forward for the proposal, and shows the swiftness with which the sustainable finance agenda is being pursued at EU level, it is far from being enacted. The next stage is for the full European Parliament Plenary to vote on it in Strasbourg next week, which those close to the process say is likely to reflect the ECON vote. If so, and the proposal is approved, it will go to a ‘trilogue’ – the potentially lengthy negotiations between Parliament and European Council – before being readied for legislation.
Not everyone is fully supportive of the current proposal. In a statement, Nina Lazic, Research and Advocacy Officer at lobby group Finance Watch said that, although it was “an important first step”, “it is not enough to bring about the urgently-needed shift of capital from unsustainable to sustainable investments”. Finance Watch also said “the wording in the agreed text is not sufficiently clear on how the concept of sustainability performance, as introduced by the ECON committee, is linked to the concept of sustainable investment, as defined in the agreed text”.