Active is: Being informed of ESG Regulation developments
Sustainable Finance in Europe – Quo Vadis?
At this stage, the work done by the EU Sustainable Finance Action Plan and Technical Expert Group cannot be ignored anymore. Instead, what investors and the financial community can take action on is to provide constructive feedback on how to execute the regulation most efficiently.
Sustainable Finance agenda in the
European Union (EU) is being executed
rapidly and ambitiously across all asset
classes and main financial products.
This is no longer a topic of “If”; this is a
topic of “How high?”.
ESG Regulation is approaching corporate
and investor disclosures,
sustainability preferences at investment
methodologies, investment benchmarking,
and green bonds.
Many actions, such as market testing,
have to be taken to adapt to changes,
but there are still questions outstanding,
e.g. when will fiscal policies like
global carbon pricing support sustainable
“How high?” – What is the European ambition on sustainability and what role do investors play?
The EU ambition for sustainable finance is tri-fold. It is to
reorient capital flows towards sustainable investment,
mainstream sustainability into risk management, and
foster transparency and long-termism.
At this stage, the work done by the EU Sustainable
Finance Action Plan and Technical Expert Group
cannot be ignored anymore. Instead, what investors
and the financial community can take action on is to
provide constructive feedback on how to execute the
regulation most efficiently.
Our expectations from the EU Sustainable Finance regulation proposals
While the EU Action Plan should be viewed as one whole, we aim to dissect the current developments, how each piece of
legislation interlinks, and most importantly – What are the investment implications?
Disclosures and Investment Selection
Green Bond Standards
Funds to disclose on their ESG
integration and risk management;
MiFID II, IDD, IORP II to include ESG
ESG disclosures for all
Benchmarks, and the
creation of new Climate
labelling across the
New definition of
Demand for transparency,
scalability, and clear methodology
in ESG investments
Transparency for assessment
of ESG performance against
across the EU Green
Easiest path of lowest
resistance to define
Develop a robust methodology
and process to classify sustainable
Ask/provide reporting on
ESG and climate for funds
bonds and funds
Company activities to
be mapped to
Unresolved questions that still need answers
How to scale up the Taxonomy implementation that is addressed by the Technical Expert Group (TEG) workstream? Is the answer mandatory reporting?
“Data Availability is the greatest hurdle for the implementation of
… A detailed user guide is being developed [by TEG], and an internet
tool, as well as, usability tests are planned.”
TEG panel, Brussels, 2019
When will fiscal policies begin supporting the Sustainable
Finance developments to level the playing field?
Carbon pricing can serve as a market-based instrument to limit global
warming by internalising the costs of and increasing the transparency
of the carbon emissions.
Global alignment is necessary to succeed in driving a meaningful
change and avoiding regulatory arbitrage.
Fiscal Policies by member states and the EU need to be scaled up to
support the sustainability transition.
More sovereign green bond issuances – a green bund or a green gilt?
We expect a shift in asset allocation
and stock selection towards
investment strategies and companies
that transparently disclose their
ESG profile, risks, and opportunities,
with a meticulous methodology.
Predominantly, this could be due to
rising client demand for ESG
through MiFID II, IDD, and regulatory
pressure via IORP II.
This is the time for everyone to pilot
test the Sustainable Finance proposals
in the market, for investors to
ask and corporates to disclose along NFRD guidelines, to use the regulatory
change as a product
innovation opportunity, and build
internal ‘star’ experts on the many
facets of EU Sustainable Finance.
Taxonomy refers to the proposal for a regulation on the establishment of a
framework to facilitate sustainable investment (2018/0178(COD)). Status as
at publishing this paper: agreement on the position reached in the
European Parliament (EP), trilogue ongoing between EP, European Council
(the Council), and the European Commission (EC), but developments are
likely to be delayed by the current political cycle. The expected adoption of
the regulation is to be expected between end-2019 and mid-2022. EU
Taxonomy aims to serve as a “dictionary” on the economic activities that are
in-line with the six environmental objectives of the EU ; the current TEG work
has been published and already covers the first two objectives. The EU
Taxonomy can then be used what economic activities of a corporation are
sustainable, which potentially can then be aggregated on a portfolio level.
The Taxonomy is voluntary to adopt, but it will form the backbone of any
future EU ESG Regulation. For example, under the investment disclosures
regulation mentioned below, the easiest solution for a fund to explain its selection
methodology is to adopt a ready-made Taxonomy.
Investment disclosures refer to the proposal for a regulation on disclosures
relating to sustainable investments and sustainability risks
(2018/0179(COD)). Status as at publishing this paper: political agreement
reached between the co-legislators on the sustainability-related disclosure
requirements. This regulation sets out how financial market
participants and advisors have to disclose their integration of ESG risks
and opportunities in their processes as part of their fiduciary duty. It also
sets the broad principles that an investment has to adhere to if claiming to
be sustainable. A key piece in this is to disclose the methodologies used to
assess, measure and monitor the E&S characteristics or the impact of sustainable
investments. Noteworthy, this regulation introduces the notion of
adverse impact on ESG matters as an investment consideration, e.g.
assets that pollute water.
IDD and MIFID II
ESG in IDD and MIFID II refers to including sustainability considerations in
the Insurance Distribution Directive (IDD) and in the Markets in Financial
Instruments Directive (MiFID II). On the 04/01/2019, the EC proposed two
Delegated Acts to include ESG considerations, which are to be adopted
once investment disclosures on ESG will be agreed at the EU level. Status:
ESMA has delivered its technical advice to the EC, which is in process of updating
the delegated acts. In the meantime, the EC has been very clear in
suggesting for investment firms and insurance distributors to already
prepare for these delegated acts to come into force. Investment distributors
will have to enquire at the point-of-sales, whether their client has ESG preferences,
which subsequently shall be reflected in the investment decision.
AllianzGI is closely involved as a member of the EU TEG on enhancing the
ESG disclosures of all benchmarks and the creation of two new investment
benchmark categories: a climate-transition benchmark and a Parisaligned
benchmark, by amending the Benchmark Regulation (2016/1011).
Current status: political agreement reached between the co-legislators
with formal rules yet to be approved. The TEG work has been published in
its interim version. These developments will require all major benchmark
providers to have at least one available benchmark from the newly developed
categories. Most importantly, all benchmarks in the EU across
different asset classes will have to disclose their ESG characteristics, with
significant benchmarks having extra criteria. Currency and interest rate
benchmarks are out of scope. The TEG has also developed benchmark decarbonisation
requirements coherent with Paris Alignment targets, which
can aid in the investment benchmarks to be used for improved transparency,
awareness, and comparability.
Green Bond Standard
Green Bond Standard refers to creating an EU-wide label for Green Bond
issuances as a result of proposals by the TEG on Sustainable Finance. It
builds on the current best market practices, such as transparency and useof-
proceeds approach. The standard will be voluntary and applicable to
EU or international projects, as well as, applicable to both listed and
non-listed bonds. It will comprise of four components: alignment of Green
Projects with the EU Taxonomy, a Green Bond Framework, reporting on
allocation and impact, and accredited verification, which are further supported
by 10 recommendations on how to support and monitor the
adoption of the EU GBS. The purpose for this is developing a standard set
in legislation, which standardises the Green Bond issuance to improve
credibility and transparency. The Green Bond Standard is also very likely
to be used as the fixed income verification for the upcoming EU Financial
MiFID II: Markets in Financial Instruments Directive II IDD: Insurance Distribution Directive IORP II: Directive on Institutions for Occupational Retirement Provision II NFRD: Non-Financial Reporting Directive
i. 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; protection of healthy ecosystems
ii. European Securities and Markets Authority
iii. Life insurance, Insurance-based investment products (IBIPs), and Undertakings for the Collective Investment in Transferable Securities (UCITS),
private and occupational pensions
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About the author
Global Head of ESG
Dr Steffen Hörter is the Global Head of ESG at Allianz Global Investors which he joined in 2001. He is internationally responsible for the ESG integration strategy at AllianzGI including ESG Policy and Framework, ESG Investment Positioning, ESG Investment Offering/ Product Design and ESG Client Investment Advisory.
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