European Commission proposes regulations to strengthen ESG alignment

The European Commission wants institutional investors and money managers to demonstrate how their investments align with environmental, social and governance factors under proposed regulations.

The commission outlined Thursday four proposals under its action plan for financing sustainable growth.

Among the proposals is for regulation to introduce consistency and clarity on how institutional investors — including pension funds and insurance companies — should integrate ESG in investment decision-making processes. The commission said in a news release the exact requirements under this proposal will be further specified at a later stage.

Another proposal was for the introduction of a unified European Union classification system or taxonomy, with harmonized criteria to determine whether an economic activity is environmentally sustainable. The commission would identify activities that qualify as sustainable, using existing market practice and initiatives, as well as advice of a technical expert group that it is in the process of setting up. "This should provide economic actors and investors with clarity on which activities are considered sustainable so they take more informed decisions," said the commission in a news release. It may serve as the basis for standards and labels for sustainable financial strategies to be established in the future.

The third proposal is to introduce rules to create a new category of benchmarks made up of low-carbon versions of standard indexes and positive carbon impact benchmarks. "This new market standard should reflect companies' carbon footprint and give investors greater information on an investment portfolio's carbon footprint," said the commission.

The final proposal relates to a consultation by the commission assessing how best to include ESG considerations into the advice given to clients by money managers and insurance distributors. The commission wants the assessment of strategy suitability for a client to also take sustainability preferences of an investor into account.

The European Parliament and European Council will now review these proposals, with legislation scheduled to be adopted starting late next year. The taxonomy proposal will take until 2022 to resolve, and the investment advice rules under the fourth proposal will first go to a public consultation.

"We should put our money into projects that are compatible with our decarbonization objectives and the fight against climate change," said Valdis Dombrovskis, vice president at the EC responsible for financial stability, financial services and the Capital Markets Union initiative, in the release. "This is important for the environment and the economy, but also for financial stability. Between 2007 and 2016, economic losses from extreme weather disasters rose by 86%. The proposals presented today show that the European Union is committed to ensuring that our investments go in the right direction. They are about harnessing the vast power of capital markets in the fight against climate change and promoting sustainability."

Jyrki Katainen, vice president responsible for jobs, growth, investment and competitiveness saud that achieving the EU's 2030 climate targets requires around €180 billion per year of additional investments in energy efficiency and renewables. "Mobilizing private capital to fund sustainable investment is essential," he said.