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​​Sustainable Finance – sustainability risks and factors: legal certainty is required


​​​Sustainable Finance – sustainability risks and factors: legal certainty required


​Updated: October 2019


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​PROPOSED SOLUTIONS AND ACTIONS 

It would make sense for the European legislator to set a (minimum) standard that product manufacturers or certification bodies can use. Without a common taxonomy, we support integrating ESG preferences with the MiFID II requirements through a high-level principle-based approach. Further specifications should occur only when the legal bases exist (i.e., when the Taxonomy Regulation has been finalised and has entered into force). It is also important to ensure a level-playing field for all market participants, with the same rules applying to similar businesses, in particular with regard to product governance and the advisory process. 


IDENTIFIED CONCERNS 

Concerns have been expressed about the timing. Not only is the absence of a clear view on the outcome at level 1 on the framework to facilitate sustainable investment (“Taxonomy”) challenging, but the lack of legal definitions makes integrating sustainability risks and factors problematic, both from a Better Regulation and implementation point of view. Currently, a lack of common market standard that capture all relevant ESG factors in a suitable way implies that entities use a wide range of different labels, with different scoring and scales. This situation makes comparison difficult or impossible for customers. The adoption of the taxonomy will only clarify the integration of some environmental considerations. However, the integration of other factors and risks (social and governance) will continue to be challenging. 


WHY POLICYMAKERS SHOULD ACT

In this context, initial flexibility would be welcome, but universal applicability, functionality and comparability in particular should be ensured. There should not be differences in terms of overall applicability and usability of the standard between different sectors. Otherwise, the standard will effectively steer investment into certain assets, while failing to have a larger impact on the market as a whole.​


BACKGROUND

The Commission plans to clarify through level 2 initiatives how asset managers, insurance companies, and investment or insurance advisors should integrate sustainability risks and, where relevant, other sustainability factors. 

The Commission will further specify: 

  • Organisational requirements, in particular the integration of sustainability risks in the corporate governance mechanisms within the organisation of the financial market participants and investment and insurance advisors; 

  • Operating conditions, in particular the integration of sustainability risks within the conduct of business or prudent person rules and due diligence requirements; 

  • Risk management, in particular to require that risk assessments should consider both financial and relevant sustainability risks; and 

  • Target market assessment, in particular to ensure that sustainability factors are taken into account in the target market assessment by investment firms manufacturing financial instruments and their distributors, and insurance undertakings, intermediaries manufacturing insurance products for sale to customers and insurance distributors. 

EIOPA and ESMA provided technical advice in April/May 2019. The Commission will now take into account this advice in order to update MiFID II delegated acts. EIOPA and ESMA will also provide guidelines after the issuance of level 2 legislation.