Sustainable Finance Regulation is a gamechanger for the whole financial services industry. With our newest PwC Legal White Paper we provide more clearance on this massive new regulation.
The Paris Climate Agreement has a profound impact on the financial services industry. To encourage the implementation of environmental and sustainability goals, the European Commission (EC) is drawing upon the already heavily regulated financial industry for support rather than regulating the polluters directly.
By defining what is considered a sustainable activity, the incentives to become environmentally friendly will be created by means of the capital provided by the financial industry – therefore a new sustainable finance regulation has been issued by the European Commission, becoming effective as of July 2020.
Guiding Principles
In March 2018, the EC launched the Action Plan on Financing Sustainable Growth, which lays out a roadmap on how to foster more sustainable investment. The plan also indicates that the EC strongly promotes a more active regulatory role in the market for sustainable investments.
Objectives that must be furthered in order for an economic activity to be considered sustainable are the mitigation of climate change, the adaptation to a changing climate, the sustainable use and protection of water and marine resources, the transition to a circular economy including waste prevention and recycling, pollution prevention and control, and the protection of healthy ecosystems. These are planned to be the guiding principles by which upcoming regulations will become effective. At the same time, low-carbon benchmarks and positive carbon impact benchmarks will also be introduced.
Profound impact on the financial industry
Financial intermediaries are subject to the rules on how such sustainability principles are used in their work and corresponding disclosure requirements. Existing regulations will also be amended to include ESG considerations into the advice that investment firms and insurance distributors offer to their clients (e.g. MiFID II, IDD, Benchmark Regulation). As a result, the investment suitability and appropriateness checks, the advisory process, the portfolio management process and the respective disclosure requirements will all have to be revised and ESG criteria will have to be added.
As the entire investment process, starting from research to the actual investment decision, as well as the sales process will have to be reviewed and amended, the impact on the financial industry will be profound.
Disclosure reports will have to include information on the process and conditions when integrating sustainability risks in investment decisions. An assessment of sustainability risks is expected to have an impact on the returns of financial products, and internal remuneration policies with sustainability investment targets, to name but a few.
Swiss players must comply
To be granted EU market access for Swiss ESG products, Swiss players as third country companies have to comply with the sustainable finance regulation standards. Swiss market intermediaries who aim to provide financial services to an EU-domiciled client, or want to distribute financial products into the EU – affected by MiFID II or by IDD due to cross border exposure – have to follow the standards accordingly.
Retail and professional clients will have to receive a general description of the nature and risks of the financial instruments, taking into account in particular any ESG considerations and the client’s categorisation. Sustainability and appropriateness questionnaires and related processes and guidelines will have to be revised.
Key findings
- To further emphasise the implementation of international climate accords, the European Commission has decided to develop an EU-wide strategy on sustainable financing.
- Two strategies will be pursued: to increase financial contributions towards sustainable and inclusive growth, and to strengthen financial stability by incorporating ESG factors into investment decision-making.
- The existing regulatory framework for financial intermediaries will be completed by requirements for the use of sustainability criteria throughout the research and investment decision-making processes.
Dr. Günther Dobrauz
Sabine Bartenschlager-Igel
Michael Taschner
Dr. Anne Batliner
Dr. Antonios Koumbarakis
Olivia Ledebur-Wicheln