As reported in last month’s newsletter, the European Commission on 21 April adopted a package of measures to help increase the amount of money being channelled towards green investments.  As part of this package, the Commission made certain changes to some technical rules, so-called ‘delegated acts’. These amendments are designed to ensure that sustainability factors are considered in financial advice and financial products. In this way, the amended acts should help increase demand for sustainable financial products and reduce so-called ‘greenwashing’.

Green investments

The six amendments to the delegated acts involve rules on investment and insurance advice, fiduciary duties, and product oversight and governance. They will ensure that financial firms, for instance asset managers or advisers, take climate and environmental factors into account in their procedures and investment advice.

• Investment and insurance advice: Under the current rules, financial advisers need to obtain information about a client's investment knowledge and experience, financial situation, ability to bear losses, investment objectives and risk tolerance (so-called suitability test). With the amendments, financial advisers will need to carry out a mandatory assessment of the sustainability preferences of their clients or potential clients. They will have to take these sustainability preferences into account when selecting the products to be recommended to those clients. Three categories of products should be integral to sustainability preferences. First, those that pursue a minimum proportion of taxonomy-compliant activities. Second, those that pursue a minimum proportion of sustainable investments. The third category are those products that consider negative externalities on sustainability, such as reduction of CO2 emissions, protection of biodiversity, or equal treatment of men and women in investee companies. All these considerations are to be determined by the client in his or her dialogue with the financial adviser.

• Fiduciary duties: With the amendments, financial firms will take into account not only all relevant financial risks, but also all relevant sustainability risks. This might mean, for example, the impact of floods on the value of an investment, or the effect of the increase of temperature on investee companies active in the agro-alimentary sector.

• Product oversight and governance: Financial advisers and manufacturers designing financial products will now need to consider sustainability factors when designing their products.

EU Green Deal

By providing clear, long-term incentives to invest in sustainable investments, the amendments support the European Green Deal. The Green Deal aims to make the EU climate-neutral by 2050 and enhance, protect and conserve Europe’s soil, air, water and other natural capital, as well as its biodiversity. The amendments should further inspire investors to put their money into more green or sustainable projects. Furthermore, they should encourage the financial services sector to invest in activities or ventures with a positive environmental impact.

The amendments will now be examined by the European Parliament and the Council. Following this, there will be a period of 12 months to implement the requirements. The rules are expected to apply from around October 2022.

More information on the sustainable finance package and the amendments to the delegated acts