A growing interest for sustainable investing in Europe
Global warming governance and social tensions have led investors to become more aware about sustainable finance over the past few year.
Investors are now looking to have a positive impact on the society and the planet, in their daily purchases but also their investments.
This awareness is reflected through a growing appetite for sustainable investing on financial markets.
Sustainability preferences assessment in the European Union
To address this growing appetite and avoid greenwashing, the European Securities and Markets Authority (ESMA) has made it compulsory for investment firms under the Insurance Distribution Directive (IDD) and the Markets in Financial Instruments regulation (MiFID II) to assess clients’ sustainability preferences and take them into account in investment advice.
In parallel, the European Securities and Markets Authority (ESMA) implemented a Sustainable Finance Disclosure Regulation (the “SFDR”) and a European Taxonomy Regulation to help financial firms classify their products based on their sustainability factors.
The Sustainable Finance Disclosure Regulation (the “SFDR”) entered into force in December 2019 and started to apply for asset managers across the European Union from March 2021.
The “Taxonomy Regulation” has applied on a phased basis since 1st January 2022.
There regulations apply for investment firms on regulated markets that provide portfolio management, UCITS, and AIFMS (ex: banks, pension funds, robo-advisor…).
The European Commission adopted these new directives with the aim to empower investors to make sustainable investments.
Sustainable Finance Disclosure Regulation
The SFDR requires financial firms to categorize their responsible investment funds as either Article 8 (which applies to funds which promote environmental or social characteristics) or Article 9 (which applies to funds with a sustainable investment objective).
Non-sustainable funds are classified as Article 6.
This European Taxonomy aims to provide all financial actors with a common understanding of what should be considered a sustainable activity.
For the moment, the Taxonomy only focuses on environmental impacts with 6 objectives:
- Climate change mitigation
- Adaptation to climate change
- Sustainable use and protection of water and resources
- Protection and restoration of biodiversity and ecosystems
- Pollution prevention and control
- Transition to a circular economy
A social Taxonomy should be published in the coming months.
Sustainability preferences assessment
The European Union has also revised the Markets in Financial Instruments regulation (MiFID II) to make it compulsory for financial advisors to assess their clients’ sustainability preferences and take them into account in their investment decisions.
This revision should come into force in August 2022;
Article 54 on the assessment of suitability has also been expanded to include a reference to this effect:
“Information about the client’s or potential client’s investment objectives shall include, where appropriate, information about the length of time they wish to hold the investment, their risk-taking preferences, their risk tolerance and the purpose of the investment, as well as any sustainability preferences.“Commission Delegated Regulation (EU) 2021/1253 of 21 April 2021.
Sustainability preferences means “whether and to what extent a client, or potential client, chooses to include one or more of the following financial instruments in their investment:
a) a financial instrument that is invested in environmentally sustainable investments, as defined in Article 2(1) of Regulation (EU) 2020/852 of the European Parliament and f the Council (*), in a minimum proportion determined by the client or potential client ;
b) a financial instrument which is invested in sustainable investments within the meaning of Article 2(17) of Regulation (EU) 2019/2088 of the European Parliament and the Council (**) in a minimum proportion determined by the client or potential client;
c) a financial instrument that addresses key adverse impacts on sustainability factors, with the qualitative or quantitative elements that demonstrate this being determined by the client or potential client.
Sustainability preferences assessment in the UK
A different approach
Due to the withdrawal from the European Union, the United Kingdom did not transpose the European regulations about sustainable investments.
The UK Financial Conduct Authority (“FCA”) is in the process of developing its own sustainability disclosure framework, which is broadly intended to be aligned with the European Union responsible investment framework.
A classification of sustainable products in 5 categories
Coinciding with COP26 Finance Day on 3 November 2021, the FCA published a discussion paper outlining its own approach to sustainability disclosure requirements.
As in the European Union, the objective will be to make it compulsory for asset managers to classify sustainable financial products and for financial advisors to take into account clients sustainability preferences in investment advice.
Nevertheless, these rules should be proper to the UK.
More precisely, asset managers will have to classify financial products in 5 categories (from the least to the most sustainable):
- ‘not sustainable’
More details about the UK position regarding sustainable investment should be published in the coming months.
2022 looks to be a busy year in Europe regarding the regulation about sustainable finance.
The European Union, the United Kingdom and probably Switzerland should continue to publish structuring regulations about how to classify financial products and assess sustainability preferences.