“Open conflict” over ESG requirements in Europe’s €10trn packaged retail investment market

European Parliament at odds with Commission and supervisors over PRIIPs

A member of the European Parliament has declared “open conflict” with the European Commission after its decision to shelve proposals to introduce explicit ESG criteria into regulation governing retail investment products.

The regulation, relating to the €10trn market for packaged retail and insurance-based investment products (PRIIPs), was initially proposed in 2012. It will force financial institutions to provide Key Information Documents (KIDs) containing various details of their retail products to the public. In 2016, the Commission requested technical assistance from the European Supervisory Authorities to help it develop dedicated rules for environmental and social factors, to be included in the KID specifications. Those rules were being pursued through a Delegated Act – a non-legislative act to supplement or alter existing legislation.

The ESAs published their response this summer, concluding that “it would not in general be proportionate to establish specific and detailed standalone obligations at this time for PRIIPs that target specific environmental or social objectives. Such an approach would introduce legal uncertainty without heightening investor protection, given measures of a very similar kind applying already to such PRIIPs.”

The findings were informed by 34 responses to a public consultation from “national and international associations in the insurance and asset management business, dedicated responsible investment companies and organisations, banks, stock exchanges, interested individuals and other stakeholder groups”.

At an event hosted by NGO Finance Watch in Brussels last week, Green MEP Sven Giegold stressed the importance of engaging retail investors to help scale up the move to a greener financial system. He described the ESG amendments to the PRIIPS proposals as “our big achievement” and asked fellow panellist, Felicia Stanescu, Head of Financial Services Policy and International Affairs at Commission body DG FISMA: “Could you enlighten us as to what happened to this Delegated Act, which many in this room worked for?”

Stanescu replied that the ESAs had “looked at what a Delegated Act would add, and they looked at what exists already in legislation. But they see that actually there’s a lot that already exists which would – if supervisors applied things properly and rigorously – allow for better disclosure of ESG.”This refers to a statement from the ESAs, claiming that “existing sectoral measures in fact offer already, or are in the process of putting in place, a sufficiently stringent and flexible basis for the sound regulation of PRIIPs targeting environmental or social objectives, including such PRIIPs’ activities”.

The ESAs say they noted various issues when drawing their conclusions. These included the fact that ESG objectives and investment strategies “can be very varied”; and that industry-led standards around ESG would evolve “such that a determination of an EU-wide boundary between specific environmental or social objectives and other objectives remains difficult and possibly ill-advised”.

Stanescu said that instead of taking a fragmented approach to legislative amendments to promote sustainability, the Commission had decided instead to launch its fiduciary duty consultation in a bid to deal with the issue in a more holistic way.

“We thought a better approach would be a more comprehensive one, which is why we launched this consultation on investor duties. So we thought that rather than go and add it to just to one area through a Delegated Act… [we would] look at investor duties across the board – asset managers, pension funds, insurance companies – and see what we can do in legislation to strengthen their duty of care to include ESG factors and risks.”

The Commission has also confirmed this week that it plans to prioritise the creation of a taxonomy to help develop European standards around green investing.

Giegold said he was “highly disappointed” and “really angry” with the decision, accusing the Commission of “ignoring the legislative decisions of the Parliament”. “I really regard this as obstruction from your side,” he told Stanescu. “It was the first time European regulation recognised sustainable finance, and it’s now your job to come up with what you are legally required to for this Delegated Act.

“We can do the other steps later, and we are fully supportive of the other work you are doing, but you cannot say that when it comes to consumers and their information, we don’t expect details to be given, and the financial industry can say whatever they want is ‘sustainable finance’. That is not acceptable and I would like it to be noted here as an open conflict.”

A Delegated Act is called so because it is delegated to the Commission by the Parliament. But the process of delegation can also be revoked by Parliament and the European Council if they see fit.