New rules require advisors to discuss investment sustainability with clients

The European Commission (EC) adopted a comprehensive package of sustainable finance measures, with rules and proposals encompassing ESG reporting requirements for companies, fiduciary duties relating to sustainability risks, and the EU Taxonomy classification system for sustainable investments.

According to the Commission, the new package aims to enable investors to re-orient investments towards more sustainable technologies and businesses, helping make Europe climate neutral by 2050, and to position the EU as a global leader in setting standards for sustainable finance.

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Mairead McGuinness, Commissioner responsible for financial services, financial stability and the Capital Markets Union, said:

“Today’s new rules are a game changer in finance. We are stepping up our sustainable finance ambition to help make Europe the first climate-neutral continent by 2050. Now is the time to put words into action and invest in a sustainable way.”

The EC stated that it aims to create a set of rules that will, over time, bring sustainability reporting on a par with financial reporting. The new package proposes strengthening the rules under the Non-Financial Reporting Directive (NFRD), the EU directive requiring companies to disclose information on the way they operate and manage social and environmental challenges. The proposals extending the NFRD sustainability reporting requirements to all large and listed companies, meaning that nearly 50,000 companies will now need to follow detailed EU sustainability reporting standards. The Commission has also proposed the development of a separate set of proportionate standards for SMEs.

The package also contains the EU Taxonomy Climate Delegated Act, which aims to identify which economic activities contribute to meeting the EU’s environmental objectives. The EU Taxonomy, part of the EU Action Plan on Sustainable Finance established by the EU Technical Expert Group on Sustainable Finance’s (EU TEG), is a classification system enabling the categorization of economic activities that play key roles in contributing to at least one of six defined environmental objectives, and no significant harm done to the other objectives. Today’s package establishes the first set of technical screening criteria for the first two categories, climate change adaptation and climate change mitigation.

Additionally, the package contains amendments to the rules relating to investment and insurance advice, fiduciary duties, and product oversight and governance, including requirements for advisors to assess and discuss clients’ sustainability preferences, and financial firms to consider sustainability risks on investments, and to incorporate sustainability factors when designing financial products.

Valdis Dombrovskis, Executive Vice-President for an Economy that Works for People, said:

“Europe was an early leader in reforming the financial system to support investments for climate change. Today, we are taking a leap forward with the first-ever climate taxonomy which will help companies and investors to know whether their investments and activities are really green. This will be essential if we are to mobilise private investment in sustainable activities and make Europe climate-neutral by 2050.”