Last July EIOPA submitted its response to the consultation the European Commission (EC) had launched regarding the sustainable finance, whose aim is promoting a sustainable financial environment by increasing private investment in sustainable projects. Here are the main outcomes:
- EIOPA supports the EU proposal of a free and publicly accessible database containing ESG (Environmental, Social, Governance) information of corporates and financial institutions, while opposes to sharing confidential supervisory reporting data
- EIOPA supports the development of a European wide ESG benchmark, with objective and measurable criteria for the inclusion or the exclusion of assets
- EIOPA believes that financial institutions should provide an estimate on how their portfolios are in line with the goals of the Paris agreement (see below) by computing the increase in temperature (e.g. 2°C, 3°C, 4°C) related to the investments they are financing. The methodology to carry out the calculations is still to define and should help in preventing the practice of green washing (institutions appear to spend more money on advertising to be “green”, than on finding environmental-friendly practices)
- EIOPA supports the inclusion of variable remuneration for executive officers linked to non-financial performance, while opposes the introduction of a mandatory minimum share
- EIOPA agrees that insurance and pension funds should foster the environmental and social sustainability, having at disposal sustainability data and a robust and proportionate regulatory framework.
Let us take a step back, to see where all of this began.
Everything started back to September 2015, when the leaders of 193 countries stated a list of 17 sustainable development goals, to be reached by 2030, the so-called “Agenda 2030”. The goals attained a wide range of topics, among which fighting hunger, reducing economic inequalities and promoting sustainable models of production and consumption. The unsustainability of the development model was explicitly recognized for the first time.
Three months later, on December 2015, 195 countries signed the Paris agreement, committing to determine, plan, and report on their contribution to mitigate global warming. The increase in temperature should stay well below 2°C, where 0°C is pre-industrial level.
To help to make this happen, in March 2018, the EC published its Action Plan on sustainable finance, aiming at reorienting the capital flows of the private sector towards sustainable investments. Other targets of the Action Plan were to take into proper consideration the risks stemming from climate change and to promote transparency and long-termism in the financial and economic activities of the private sector.
Later or, in August 2018, the EC asked EIOPA to which extent sustainability was considered within the SII framework. EIOPA pointed out that medium to long term impacts of climate change were not fully captured in the SII capital requirements of Pillar I, being those designed to reflect the risk over just a 1 year time horizon. Another point EIOPA made was the need of a commonly agreed “taxonomy” regarding what is sustainable and what is not (https://www.finriskalert.it/climate-change-and-sii-a-cura-di-di-silvia-dellacqua).
In June 2019, the EBA (European Banking Authority) launched a consultation among the financial institutions, which resulted in the “Guidelines on loan origination and monitoring”, where it is advised to consider ESG factors in the internal policies used to grant loans and in the credit risk management practices.
Afterwards, in December 2019, Ursula von der Leyen, president of the EC, presented the “European Green Deal”: a roadmap to make all member states carbon neutral by 2050, while reducing pollution and creating job opportunities by the development of a new economy.
Later on, in March 2020, the EC published the “EU taxonomy for sustainable activities”: a technical report to help investors assessing whether or not investments meet robust environmental standards and are compliant to the Paris agreement.
This brings us to the current situation: last April 2020 the three European supervisory authorities published a joint Consultation Paper on ESG Disclosures containing proposals of common reporting standards on the sustainability of investment products, which would allow financial consultants to take an informed choice on the main positive or adverse impacts their investments can have. EIOPA submitted its response last July 2020.