Within the coming two years, several regulations on Sustainable Finance will come into effect, which will directly affect the Asset Management, Insurance, and Pension Funds activities. All of those evolutions are emerging from the overall “EU Green Deal” context, and from EU working groups on Sustainable Finance and Sustainable Insurance.
But will concerned businesses be ready ? Already, concerns have begun to be issued. On June, the 9th, several european banking, insurance, and pension funds associations wrote a joint letter to the European Commission, calling for a “centralized register for environmental, social and governance (ESG) data in the EU“, in order to be able to fulfill incoming regulatory reporting obligations… Let’s take a brief look at what is coming.
March 2021: EU Disclosure Regulation
In March 2021, the EU regulation on sustainability‐related disclosures (known as the “Disclosure Regulation”) will become applicable. The regulation will require financial market participants and advisers to provide investors with pre-contractual ESG-related information linked to specific financial products. The objective is to allow investors to make their investment decisions also on the basis of ESG insights.
For instance, regarding positive impact investments, the regulation states that “As regards financial products which have as an objective a positive impact on the environment and society, financial market participants should disclose which sustainable benchmark they use to measure the sustainable performance and where no benchmark is used, explain how the sustainable objective is met“.
2021: MiFID II and the IDD
Expected to be adopted in 2021, the EU Markets in Financial Instruments Directive (MIFID II) and the Insurance Distribution Directive (IDD) regulations focus on ESG considerations . Both amendment initiatives aim indeed at integrating sustainability risks and factors into the investment process.
More precisely, the objective of the IDD, for instance, is to “create a mandatory requirement to take into account ESG preferences in the advisory process (both in the customer profiling and product selection)“.
Jan. 2022: EU Taxonomy
Finally, the EU Taxonomy for Sustainable Finance will come into effect in Jan. 2022: this regulation aims to introduce an EU-wide classification system for ESG-related investments. Now adopted by the European Council, the agenda aims to establish the taxonomy by the end of 2020, with full application by the end of 2021.
The taxonomy will “create the world’s first-ever “green list” – a classification system for sustainable economic activities – that will create a common language that investors can use everywhere when investing in projects and economic activities that have a substantial positive impact on the climate and the environment“.
A core objective: Positive impact
A first good point, is that all the initiatives aim at measuring and reporting the environmental and climate impact, in order to contribute to tackle the Climate Change issues. The second good point, is that the objective is wider and not restricted to the environment: all ESG impacts will need to be explained, and reported—the target is the measurement of the overall “sustainable performance”, in order empower the end investors in their investment decisions.
We cannot agree more this mission statement, underlying the regulation—and this will also address the current transparency issue. The challenge investors are now facing is the way to evaluate the ESG impact of their investments. The current ESG rating approaches available on the market cannot provide an evaluation of the impact, and instead offer “an aggregate confusion“, usually anchored in intention- or policy-checking, and subjectivity…
But another approach is possible—and it must rely on quantitative ESG data analysis for a factual positive or negative impact evaluation.
Will investors be ready ? The recent joint letter from the financial investment industry seems to indicate the contrary. But if we don’t yet have the definitive answer to this last question, on our side, we already planned, and developped ESG impact rating solutions to help investors comply, be transparent, and credible.