Sustainable Finance Insights Series - 1

In December 2018, the European Commission mandated a group of social, financial and academic experts to develop a strategy on sustainable finance which incorporates Environmental, Social and Governance (ESG) considerations into investment decisions and ensures that clients are accurately informed.

To implement the sustainable strategy, the European Commission adopted a package of proposed measures:

the Regulation on the establishment of a framework to facilitate sustainable investment (the Taxonomy Regulation),
the Regulation amending the benchmark regulation (the low carbon benchmark regulation),
the Regulation on disclosures relating to sustainable investments and sustainability risks and amending directive (EU) 2016/2341.

In this respect , the European Parliament and the Council adopted on 9 December 2019 the Regulation (UE) 2019/2088 on sustainability-related disclosures in the financial services sector (hereinafter the “Regulation”).

The Regulation aims at establishing harmonised rules on transparency to be applied by financial market participants. In this respect they must systematically consider and integrate sustainability risks and performance into investment decision-making or advisory processes and provide investors with sustainability –related information on the financial products they offer or advise on.

By “sustainable investment” the Regulation means:

an investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on biodiversity and the circular economy, or
an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labour relations, or
an investment in human capital or economically or socially disadvantaged communities,

provided that :

such investments do not significantly harm any of those objectives and
that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.

FRAMEWORK

The Regulation shall be applied to financial market participants and financial advisers. According to the Regulation, “financial market participants” include:

an investment firm which provides portfolio management;
an alternative investment fund manager (AIFM);
a manager of a qualifying venture capital fund[1];
a manager of a qualifying social entrepreneurship fund[2];
a management company of an undertaking for collective investment in transferable securities (UCITS management company); or
a credit institution which provides portfolio management;

and “financial advisers” include:

an investment firm which provides investment advice;
an AIFM which provides investment advice[3]; or
a UCITS management company which provides investment advice[4].

MEASURES

The Regulation foresees disclosure measures which consist, for financial market participants and/or financial advisers, in publishing some information on their websites and including additional information in documents such as their remuneration policies, pre-contractual disclosures or periodic reports. Information published has to be kept up to date and in case of amendment of such information, a clear explanation of such amendment shall be published on the same website.