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Investors to disclose sustainability decision making under new EU rules

Investor duties and ‘eco’ labels among proposals from European Commission

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Asset managers and pension funds will have to disclose how they consider sustainability factors in their strategy and investment decisions, in particular their exposures to the risks of climate change, under new EU rules.
The European Commission (EC) will clarify investor fiduciary duty by the middle of this year with the aim, it says, of ensuring that ESG factors are ‘consistently’ taken into account and publicly reported, especially in terms of risk.
The announcement is one of the key recommendations that will impact pension funds, asset managers and their advisors in the EC’s Action Plan for Financing Sustainable Growth, its response to the work of the High Level Expert Group on sustainable finance (HLEG).
The question of the responsibility of institutional investors on fiduciary duty has been a thorny one for decades and the EC appears minded to legislate for clarity.
The EC said the move would lead to a shift towards responsible investments and capital flows to ESG investments.
In addition, the EC says financial advisors and investment consultants should be prompted to include sustainability criteria in the advice that they give to investors.
Another major announcement for investors is that the EU’s Ecolabel framework, the voluntary mark given to environmentally-friendly consumer products, will now be applicable to investment funds that meet certain criteria based on a new sustainability taxonomy to be outlined later this year. The EC believes this could influence consumers to choose sustainably when they invest their savings and retirement capital.
The finance Ecolabel will initially focus on retail investment products, but could be expanded, the EC says, towards more social criteria that would then apply to social financial products, including Socially Responsible Investment funds.In terms of investment products the EC said it would seek more transparency from sustainability indices on their selection criteria, and could also consider launching a dedicated category of sustainability benchmarks that could underpin related investment products.
In addition, the EC says it will review the solvency requirements of insurance companies, which have been criticised as obstructing insurers from making long-term investments.
In the third quarter of this year, the EC says it will ask the European Insurance and Occupational Pensions Authority (EIOPA) to assess the impact of prudential rules for insurance companies on sustainable investment and long-term investments. It says it will then review this advice in its 2020 review of the Solvency II regulations that govern insurers’ investment decisions.
Furthermore, it said that to incorporate sustainability into its suitability assessment of financial instruments and insurance products, the EC would carry out an impact assessment and then amend the MIFID II and IDD regulations. It said it had invited the European Securities and Markets Authority to include provisions on sustainability in its guidelines on suitability assessment to be published by Q2 2018.
The last major pillar of the EU’s broad sustainable finance push for institutional investors was on regulation. The Commission says sustainability objectives will be looked at in an ex post evaluation of financial rules. It said that ‘sustainability’ will be added as part of forthcoming evaluations of financial legislation, where appropriate, in addition to the current mandatory evaluation criteria for EU regulation (effectiveness, efficiency, relevance, coherence, EU added value).