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New EU Regulations on Sustainability Investments and Risks to Prevent Greenwashing

Updated: May 14, 2019

The European Commission welcomed an agreement reached by Parliament and Member States on 7 March 2019 that details new requirements on how sustainable investments and sustainability risks must be disclosed. The new rules are meant to strengthen and improve how manufactures of financial products and financial advisors of end-investors disclose information, especially pertaining to sustainability and risks. Initially, these rules were proposed by the Commission in May 2018 as a part of the Sustainable Finance Action Plan and Capital Markets Union and have now developed into an integral part of the EU's sustainable development agenda and the carbon neutrality agenda.

The new regulation details how, in order to adhere to the duty acting in the best interest of the client, financial market participants and financial advisors must integrate environmental, social and governance (otherwise known as ESG) risks and opportunities into their processes. Additionally, rules for how financial market participants should inform investors of their compliance with integration of ESG risk and opportunities are laid out in an uniform manner. This is to address the information asymmetries on sustainability issues that occur between financial market participants, financial advisors, and and end-investors. Making the information available to investors is crucial to the integration of ESG risks and opportunities, as ESG events can greatly effect the value of investments. In order to ensure the sustainability of investments, the new regulation also requires that any adverse impacts on ESG matters are disclosed as well.

There are three main pillars by which the new regulation is built around:

  1. Elimination of greenwashing: Greenwashing is an unsubstantiated or misleading claim about sustainability characteristics and benefits of an investment product. This is meant to increase market awareness on sustainability matters.

  2. Regulatory neutrality: The disclosure toolbox is introduced so as to be applied in the same manner by different financial market operators. The three European Supervisory Authorities (ESAs), and in particular the Joint Committee of the Authorities, will ensure further convergence and harmonization of disclosures in all the sectors concerned.

  3. Level playing field: The following financial services sectors are covered by the new regulation: (i) investment funds; (ii) insurance based investment products (life insurance products with investment components available as individual retail life policies as well as group life policies); (iii) private and occupational pensions, (iv) individual portfolio management; and (v) both insurance and investment advice.



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