Europe gets tough on investment sustainability
The EU’s sustainability agenda expanded last week with the announcement of new sustainable investment disclosure rules.
In October, I explored how the UK’s Financial Conduct Authority could flex its regulatory muscle to force regulated companies to disclose environmental risks; these new Commission rules now cement the requirement to disclose environmental, social and governance risks in investment products.
The rules will hit investment funds, insurance-based investment products, private and occupational pensions, individual portfolio management, and insurance and investment advisors. They mean these entities will need to disclose:
The procedures they have in place to integrate environmental risk into their investment and advisory processes;
The extent to which those risks might have an impact on the profitability of the investment; and
Where they make claims around the environmental credentials of an investment strategy, specific information on the climate impact of that strategy (with the EU setting a specific agenda to eliminate “greenwashing” which it has defined as unsubstantiated or misleading claims about sustainability characteristics of an investment product).
With regulators taking increased interest in how investors are responding to climate risk, clients have been asking,
“Are any of the companies in my portfolio ‘greenwashing’ their products?”
“How should I perform due diligence on investment products given the new EU requirements?”
“Given the controversy over sustainability methodologies, how do I protect against litigation risk?”
While there isn’t a single approach that will be right for every business, every company should start to strategically manage and report its climate risks. Few funds are likely to immediately follow Norway’s sovereign wealth fund and look to divest entirely from upstream oil and gas producers, but all would do well to look very closely at how climate risk is incorporated in their business and investment decisions. The social sustainability of investments, already a key component of European renewable fuels legislation, will be another key area which portfolio managers will need to cover when drawing up their product portfolios.
The full legislative package that forms the backbone of last week’s European Commission announcement is still nascent. But as I’ve written here before, firms can’t wait to be told by regulators how to transition to a low carbon future. The direction of policy is clear and firms need to respond now.
With just over two weeks to go before Brexit, it’s possible the UK will break with the EU requirements, but given the UK regulator’s increasing focus on climate change it’s unlikely the UK will take a softer approach to disclosure requirements.
Want to keep up with developments in the regulatory space or find out more about your particular regulatory requirements? Email ruth@zeilbergerstone.com.