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EU plans ‘higher sustainable finance ambitions’ under new Commission

Busy weeks ahead for policymakers with progress on MIFID, ESG data, ‘fitness check’ and fiduciary duties

The EU expects to “shift gear” on its sustainable finance agenda under the new Commission, and has made recent leaps forward on a number of its key objectives under the Action Plan on Sustainable Finance.

Speaking on an RI webinar on Friday, Martin Spolc, Head of the Sustainable Finance and Fintech unit in the Commission’s Directorate General for Financial Services, said that last week, European member states had gathered to discuss plans for sustainable finance under the leadership of the next European Commission, adding that “it’s clear that we need to shift the gear to a higher pace and higher ambition”.

Ursula von der Leyen will take over the Commission presidency from Jean-Claude Juncker later this week, and pledged to introduce a European ‘Green Deal’ within the first 100 days of taking office. The deal is expected to include a number of pillars, including sustainable finance.

Spolc said that final decisions were yet to be made on the agenda, but that “we are looking at four clusters”, including global cooperation (with a particular emphasis on the role of developing markets), ESG data and coping with financial sector environmental risk.

Fourthly, he said, “we are looking very carefully at – and this needs higher ambition – the impact [of the policy package].”

“The Action Plan is about developing tools and frameworks that we hope investors will use, but we’re not forcing them to – we’re relying on the willingness of the financial sector. What we need to do, under the next strategy, I believe, is to maximise the impact of those tools and frameworks and to find the right incentives.”

Part of this could include taking public guarantees and other support mechanisms and “marrying them better with the private sector”, he said.

In the meantime, there have been a series of developments under the existing Action Plan, he told the audience. He said, for example, that he expected a political agreement to be reached on the green taxonomy by the end of the year. This will allow the Commission to create a replacement ‘platform’ for the current Technical Expert Group on Sustainable Finance (TEG), whose mandate ends in December.

“Once we have a deal, the Commission will act immediately to set up this platform,” Spolc confirmed, adding that – like HLEG and TEG – it will include representatives from the private sector, academia, consumer groups and NGOs, among others.

In addition, he said legislation agreed earlier this year, requiring institutional investors and asset managers to disclose how they integrate ESG into their investment decision making, would be published in the Official Journal of the EU, the gazette of record, by the end of the year, in preparation for enactment at the start of 2021.

The EU is “almost ready” to adopt changes to MIFID II, requiring investment advisors to ask retail investors about their ESG preferences when offering advice, he continued.Likewise, the Commission – having received advice from EIOPA and ESMA on fiduciary duty – “are almost ready, and we believe this piece will be adopted as soon as possible in the beginning of next year”.

“There is also an ongoing study on the possible need to clarify the rules according to which [company] directors are expected to act in the companies’ long-term interest,” he pointed out, saying the results of that study would be in “very, very shortly”.

“We’re relying on the willingness of the financial sector.”

The ‘fitness check’, assessing EU legislation on corporate reporting, has also been concluded and the Commission will disclose the results “over coming weeks” and decide on further actions. RI reported earlier this year that 338 submissions had been made as part of the check.

By the end of the year, the European Supervisory Authorities are also slated to deliver advice to the Commission on whether there is any ‘undue’ short-term pressure on companies by the financial sector, which could hinder sustainability.

The EU also plans to extend its ‘eco-label’ (currently used to help consumers identify ‘ecological’ goods such as detergent) to cover financial products. Spolc said the Commission was “well on track” with the initiative, and expects the “first deliverable of that work by the second quarter of 2020”. If the taxonomy is finalised in time, then the Ecolabel for Financial Products will begin being adopted into law by the second quarter of 2021.

On the controversial discussions around altering capital requirements for banks who lend to ‘green’ projects, the Commission is in the process of launching a study “to explore how to incorporate ESG factors in banks’ strategies and prudential requirements”. In addition to addressing a potential ‘green supporting factor’, the study will also look at ESG in risk management, business strategies and investment policies for banks.

“For us, this is a key area we would like to explore under the new Commission,” observed Spolc.

The Commission will also kick off a study in December on ESG data and ratings, which “will shed light on the market structure, types of tools, types of providers as well as their role as intermediaries between companies and investors.” This will be released next autumn.

Earlier this month, the European Commission partnered with China, India, Canada and others to launch an international platform dedicated to sustainable finance. The group will have its first meeting in Paris this week, where it will focus on mapping the various initiatives already underway in different jurisdictions. “Once we’ve completed that mapping, we will discuss collectively whether there is some potential for convergence on these tools and frameworks and decide whether there is a willingness to do that,” said Spolc, adding that the initial signs for convergence were “positive”.

“I expect the Platform to be expanded over time because we’ve already received some interest from other countries that would like to join,” he noted.