European Commission seeks advice on incorporating ESG across financial market regulation

Formal request goes to EU supervisory bodies EIOPA and ESMA

The European Commission has made a formal request for technical advice from the EU’s main financial supervisory bodies on how to integrate sustainability across its main financial markets legislation.

It wants advice on how the bloc’s rules can be amended to “explicitly require” the integration of sustainability risks – with remuneration being mentioned as one way it could be achieved.

The scope of the task covers the legislation on the EU’s €10trn UCITS investment fund market as well as rules on alternative investment funds (AIFMD), investment advice (MiFID and the Insurance Distribution Directive, IDD) and insurance (Solvency II).

There has already been pushback from market players responding to the EU’s plans to get ESG into MiFID.

The regulators are also being tasked to make sure any proposals take account of potential amendments to the existing IORP pension directive, whose recent revision also saw the incorporation of ESG elements.

The letter from Olivier Guersent, Director-General for Financial Stability, Financial Services and Capital Markets Union, was sent to the heads of EIOPA and ESMA, respectively the European Insurance and Occupational Pensions Authority and European Securities and Markets Authority.

It is a follow-up to the EU’s High-level Expert Group on sustainable finance and the formation of a new Technical Expert Group and aims to “explicitly require the integration of sustainability risks, i.e. environmental, social and governance risks in the investment decision or advisory processes as part of duties towards policy holders, customers and/or beneficiaries”.

The deadline for the advice is April 30 2019 (just before the current European Commission’s term ends) and ESMA and EIOPA should look at the policy options available – and provide cost-benefit analyses.

Guersent notes that while the existing rules provide scope for integrating sustainability, market participants “do not systematically consider and integrate them in a consistent way”.The current rules, he adds, “do not explicitly specify” how to consider the financial impact of sustainability risks on portfolios or recommendations.

Guersent is calling on “close cooperation” between all parties, and wants Commission staff to join the supervisors’ working groups as observers.

He writes: “Sustainability risks may have an impact on portfolio performance and so affect the ability of relevant financial market participants to meet their obligations. “

The lack of integration of sustainability risks was “hampered by the existing legal uncertainty” and confusion between ESG and ethical investment.

Guersent mentions pay as one lever to take the process forward. EIOPA and ESMA “should not feel restricted” and feel free to develop recommendations “to better ensure the effectiveness of the integration of sustainability risks in the given frameworks, i.e. remuneration.”

“Hampered by the existing legal uncertainty”

EIOPA and ESMA are invited to consult market participants, possibly in a joint initiative. If they find significant administrative burdens or compliance costs, they should aim to quantify them, Guersent says.

And he stresses the advice should not take the form of a legal text but be delivered in “easily understandable language”.

Meanwhile, there’s been a call for banks to be “fully included” in the EU’s plans.

“Banks still hold the key to making finance more sustainable in the European financial landscape,” says MEP Paul Tang in a draft report on the EU’s planned amendments to promote sustainable finance disclosure.

“Banks should integrate sustainability risk when making available financial products, in its risk- management and in its corporate loan origination process.”

The Dutch MEP also calls for pension funds to have to carry out “due diligence” under the OECD’s Guidelines for Multinational Enterprises.