European Commission Proposes Legislative Package on Sustainable Finance

The European Commission has published a package of legislative reforms on sustainable finance. The aim of the package of reforms, which form part of the Commission's broader Capital Markets Union initiative, is to ensure that environmental, social and governance considerations are consistently integrated into the investment and advisory process across sectors. The proposed measures comprise:

(i) a proposed Regulation on the establishment of a framework to facilitate sustainable investment. This will establish an EU-wide classification system for environmentally sustainable economic activities and ensure that investment strategies are oriented towards economic activities that genuinely contribute to achieving environmental objectives. The proposed Regulation will empower the European Commission to adopt delegated acts to specify technical screening criteria to assess the contribution of a given economic activity to a particular environmental objective as substantial. A list of six environmental objectives is set out in the proposed regulation, namely: climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy, waste prevention and recycling; pollution prevention and control; and protection of healthy ecosystems (which includes biodiversity conservation).

(ii) a proposed Regulation on disclosures relating to sustainable investments and sustainability risks. This proposed Regulation imposes transparency and disclosure requirements on financial market participants (as defined in the proposed regulation), insurance intermediaries and financial advisors. The European Supervisory Authorities will be mandated to develop Regulatory Technical Standards further specifying the disclosures to be made and Implementing Technical Standards on presentation of sustainable investments in marketing communications.

(iii) a proposed Regulation amending the Benchmarks Regulation to introduce a new category of benchmarks, consisting of a "low carbon benchmark" and a "positive carbon impact benchmark." The proposed Regulation will also require administrators of benchmarks or families of benchmarks that pursue ESG objectives to explain, in the benchmark statement, how the key elements of the benchmark methodology reflect ESG considerations.

(iv) a proposed Commission Delegated Regulation amending delegated legislation under the revised Markets in Financial Instruments Directive on operational requirements and operating conditions for investment firms and defined terms. The amendments relate to the requirements to conduct suitability assessments and will require investment firms providing financial advice and portfolio management to assess their clients' ESG preferences, provide clients with information on the ESG factors of financial products (before provision of advice or portfolio management services) and report to clients including on how a recommendation meets a particular client's ESG preferences.

(v) a proposed Commission Delegated Regulation amending delegated legislation under the Insurance Distribution Directive. The amendments clarify that insurance intermediaries and insurance undertakings must assess their customers' sustainability preferences and must include information on a customer's ESG preferences in suitability statements.

The Commission is seeking feedback on its proposed regulation amending the Benchmarks Regulation by July 24, 2018 and on its proposed Commission Delegated Regulations amending secondary legislation under MiFID II and the IDD by June 21, 2018. The other proposed regulations are not open to public consultation and will be considered by the Council of the European Union and the European Parliament.

View the proposed Regulation on the establishment of a framework to facilitate sustainable investment.

View the proposed Regulation on disclosures relating to sustainable investments and sustainability risks.

View the proposed Regulation amending the Benchmark Regulation on low carbon benchmarks and positive carbon impact benchmarks.

View the proposed Commission Delegated Regulation amending delegated legislation under MiFID II.

View the proposed Commission Delegated Regulation amending delegated legislation under IDD.