European Commission publishes new Sustainable Finance Strategy

The European Commission (EC) has published its new Sustainable Finance Strategy, which includes several proposals that will impact the pensions industry.

It also proposed regulations on a voluntary European Green Bond Standard (EUGBS) to set a ‘gold standard’ available to all issuers to help finance sustainable investments, and to help companies and public authorities use green bonds.

The Sustainable Finance Strategy builds on the 2018 action plan, which has been largely implemented.

It detailed proposals to develop reporting obligations under the Sustainable Finance Disclosure Regulation (SFDR) to include more reporting on the decarbonisation of financial products and social factors.

The EC also proposed changing the prudent person rule under IORP II to require pension funds to consider participants’ sustainability preferences in investment decisions.

Furthermore, pension schemes considering the non-financial impact of investment decisions on ESG factors could become mandatory.

The EC will also extend the EU Taxonomy to include more sectors and greater account will be taken of economic activities that play a role in the transition to a net-zero economy.

The EUGBS will give issuers a tool to show they are funding green projects aligned with the EU Taxonomy, while investors buying the bonds will be able to see whether their investments are sustainable more easily, which the EC hopes will reduce the risk of greenwashing.

“Today's Sustainable Finance Strategy is key to generate private finance to reach our climate targets and tackle other environmental challenges,” commented EC executive vice-president for an economy that works for people, Valdis Dombrovskis.

“We also want to create sustainable funding opportunities for small and medium-sized companies. We will work with our international partners to deepen cooperation on sustainable finance, as global challenges call for global action.

“We also propose a Green Bond Standard to fight greenwashing and clearly recognise those bonds that truly represent a sustainable investment.”

However, PensionsEurope secretary general, Matti Leppälä, warned that the EC needs to take proportionality of IORPs into account: “It is alarming that the EC communication states on double materiality that ‘This will need to be complemented by further action for the 125,000 pension funds in the EU managing collective schemes on behalf of around 75 million Europeans. To enhance their contribution to the Green Deal targets, it is critical that the fiduciary duties of investors and pension funds towards members and beneficiaries also reflect the inside-out ESG risks of investments as part of investment decision making processes.’”

“Most of these 125.000 IORPs are very small and the number of IORPs of a meaningful size is only a few thousand. It is vital and a legal requirement that any EU action has to be in accordance with the principle of proportionality and it would also be preferable for any action to take first into consideration the upcoming revision (in 2023) of the IORP II Directive.”

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