Insights

It’s All Change in 2020

One thing is certain: 2020 is going to see tremendous change in sustainable finance. This will apply first and foremost to any financial institution with business ties to the European Union (EU). You’ll also be surprised at how little people in compliance, product development, and even investment departments know about the imminent changes – unless they have a very strong ESG team. And even if they are up to date, it’s unlikely that they will have the necessary technical expertise and data. This is a huge opportunity for ESR/sustainability/ESG teams.

The two key drivers of change:

  • On December 9, 2019, the EU published the new Regulation on Sustainability‐Related Disclosures in the Financial Services Sector.[1] Our recent legal analysis of the package resulting from the EU action plan for sustainable finance shows that, depending on type, financial institutions are facing up to 300 action items.[2] These apply to any financial institution that has a branch or subsidiary in the EU, manages an EU-based product, is seeking to acquire clients in the EU, or is selling products to them.
    By June 30, 2021, for example, financial market participants will have to publish information about how they integrate sustainability risks into their investment decision-making processes and investment or insurance advice. They will also have to publish statements on how they take into account the principal adverse impacts[3] on the environment and society resulting from their investment decisions – or explain why they do not.
  • Equally importantly, the European Green Deal[4] announced on December 11, 2019 finally provided us with an initial regulatory roadmap[5] for the real economy in Europe. Late last year,[6] we explained why it was difficult for the financial sector to act on climate risk as long as such roadmaps were not available: it makes it practically impossible to predict transition risk and assess new market opportunities available to clients or investee companies. Now it will be easier.

If you have the opportunity, support the investment arm of your institution in developing policies, due diligence and assessment processes, as well as reporting and disclosure frameworks. It will be a game changer and provide the basis for work that will affect other products and services in a second phase.

 

1. Regulation (EU) 2019/2088 on sustainability‐related disclosures in the financial services sector (27 November 2019). On the same day, the EU also published Regulation (EU) 2019/2089 amending Regulation (EU) 2016/1011 as regards EU climate transition benchmarks, EU Paris-aligned benchmarks and sustainability-related disclosures for benchmarks (27 November 2019).
2. For further information, please contact one of our legal analysts at policy@ecofact.com
3. Please note that the concept of adverse impacts is closely aligned with how risk is used in the OECD Due Diligence Guidance for Responsible Business Conduct. In the words of the OECD, assessing “adverse impacts […] is an outward-facing approach to risk,” focusing on assessing the likelihood of adverse impacts on people, the environment and society that an enterprise may cause – and not about risk for the investor or the financial institution itself. The Regulation (EU) 2019/2088 explicitly states that “financial market participants and financial advisers should consider the due diligence guidance for responsible business conduct” developed by the OECD.
5. As part of the New Green Deal, the EU has announced that it will review all regulations in order to align them with its climate goals; it will also propose the first European climate law and launch a new circular economy action plan by March 2020.

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