European Commission’s proposals on financing sustainable growth
The Action Plan on Financing Sustainable Growth was launched by the European Commission on 8 March 2018 (link here).
Yesterday, the EU Commission published the frequently asked questions, giving the public a greater understanding of how the commitments on financing sustainable growth are going to be delivered on.
The Action Plan has three objectives:
- Reorient capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth;
- Manage financial risks stemming from climate change, natural disasters, environmental degradation and social issues;
- Foster transparency and long-term outlook for financial and economic activity
Steps to meeting the objectives:
- Definition clarity
To be able to reorient capital flows towards sustainable investment, one needs to know what a sustainable investment is. A lack of clarity among investors on what makes a sustainable investment contributes to an investment gap and is an obstacle to financing of social infrastructure initiatives. Thus, the Commission wants to create an EU-wide classification system or taxonomy to provide businesses and investors with a common language to help them identify what degree economic activities can be considered environmentally-sustainable.
- ESG risks integrated into investment and advisory processes
The Commission also wants to ensure that asset managers, institutional investors, insurance distributors and investment advisors include ESG factors in their investment decisions and advisory processes and that they increase transparency towards their end-investors on how they integrate sustainability factors in their decision-making processes. The Commission plans to adopt delegated acts to various sectoral EU legislations which will set out the rules on how financial market participants should inform investors about their compliance with the integration of ESG risks and opportunities.
- Measuring company’s carbon footprint
Environmental and climate risks are currently not always adequately taken into account by the financial sector, says the Commission. The financial losses associated with climate changes and natural disasters cost the worldwide economy EUR 117 billion in 2016, and the numbers are growing. To tackle the problem, the Commission proposes to create a new benchmark category for low-carbon and positive-carbon impact to measure a company’s footprint and, in consequence, an investment portfolio’s carbon footprint. The Commission also proposes to develop climate-related metrics for the purposes of corporate reporting.
- Sustainability suitability tests
Asset managers and insurance distributors are to assess their client’s investment objectives when delivering their products. Other than checking on the standard preferences, such as risk appetite, risk profile, purpose of the investment, holding period etc., providers are to consider client’s non-financial preferences, such as environmental and social impact concerns as well.
According to the timetable set in the Action Plan, all actions shall be rolled out by Q2 2019 and the first delegated act covering the climate change adaptation and mitigation objectives could be adopted by year-end 2019.
Permian commits themselves to following closely on the development and adaptation of the future delegated acts, especially those affecting asset managers regulated under the AIFM directive, EuVECA, EuSEF and ELTIF regulations, to make sure our clients stay on top of the new ESG and transparency requirements towards their investors.
Link to the European Commission FAQ here
In case of any questions, please reach out to Agata Sniecikowska at firstname.lastname@example.org
Photo credits: European Commission