Political agreement brings EU regulation on investors’ ESG disclosure closer

Late night political wrangling on sustainability disclosure measures

The three EU law-making institutions, the European Parliament, the Council of the EU and the European Commission, have said they reached a political agreement to adopt the draft Regulation on ESG disclosures affecting institutional investors.

Representatives of the three institutions held their fifth so-called ‘trilogue’ meeting on the draft Regulation, from 3 pm yesterday until 5 am today, in what was the last chance for Parliament and Council to agree on a compromise text before the European Elections.

The draft Regulation on disclosures relating to sustainable investments and sustainability risks is one of the three legislative initiatives promoted by the Commission’s Sustainable Finance Action Plan, together with low-carbon benchmarks and the taxonomy.

Among other measures, it mandates institutional investors to publish written policies on the integration of ESG risks in their decision-making process.

Despite the press announcements by the European authorities, it is worth noting that details of the trilogue agreement have not been published yet.

The Council stated: “The text agreed today sets out a harmonised EU approach to the integration of sustainability risks and opportunities into the procedures of institutional investors.”

According to the Council, the next step will be to finalise the text “at technical level” before the Coreper (Committee of Permanent Representatives in the EU) approves it by the end of March.

A further step would involve the plenary of the Parliament to confirm the trilogue deal. Due to the European Elections, the linguistic review of the Regulation will be undertaken by the next Parliament in September or October, with an expected final publication by the end of 2019.

RI understands that some trilogue discussions have focused on the potential “adverse sustainability impact” of disclosure requirements, as well as concepts such as “mandatory due-diligence” and disclosures of sustainability performance.Another point of contention has been the scope of the law, in particular, whether investee companies should be included. Regarding the implementation of the law, there has been division on whether to use regulatory technical standards or guidance — the latter method is the one supported by the Council.

Expressing his views on social media, Will Martindale, Director of Policy and Research at the Principles for Responsible Investment, welcomed “the use of the word ‘must’ removing any ambiguity: financial market participants ‘must’ integrate ESG”.

Regarding requirements to disclose “the adverse impact of ESG matters”, Martindale highlighted: “This would be the first regulatory-backed disclosure framework for the adverse sustainability impacts of investment activity.”

Eleni Choidas, European Policy Manager at ShareAction, said she was pleased to see that the Commission’s original proposal had been expanded to include mention of the impacts of investment activities on communities and the environment rather than being limited to the financially material risks on the performance of products and portfolios.

“We are encouraged by the provisions to ensure these requirements eventually become mandatory for financial market participants of a certain size and believe more guidance is needed in order to best operationalise the comply-or-explain principle present in this legislation.”

In a comment piece for RI this week, Kees Vendrik, Chief Economist at Triodos Bank, warned that the devil is in the detail where the Action Plan is concerned.

“Those who publicly support the principles of transparency, suddenly realise that it might actually apply to them,” Vendrik wrote.

He added: “The pushback on the European Parliament proposals by member states in recent weeks does not serve Europe’s ambition to show leadership in the sustainable transition of economy and society. The financial sector runs the risk of undermining precarious public confidence by putting ‘official’ green stickers on existing funding and investments.”

The RI Europe 2019 conference will major on crucial discussions around what the EU Action Plan on Sustainable Finance means for investors and companies.

Click to see the programme