New proposals published by the European Commission this morning will require financial entities that manage investments on behalf of their clients or beneficiaries to inform them about how their activities are impacting the planet or their local environment, enabling investors to make more informed investment choices.

The proposals are intended to further confirm Europe's commitment to be the global leader in fighting climate change and implement the Paris Agreement.

The Commission said that following up on the first ever EU Action Plan on Sustainable Finance, the proposals will allow the financial sector to throw its full weight behind the fight against climate change. The EC set out what it describes as “compelling arguments” for putting the financial sector at the service of the planet, including:

• the impact of climate change already threatens financial stability and leads to major economic losses through floods, land erosion or draughts. Last year, the amount of catastrophe-related losses covered by insurance reached an all-time high of €110 billion.
• waking up too late to the reality of global warming could see many of today's investments end up being redundant.
• we should make the most of the new business opportunities for sustainable economic activities.

Launching the proposals, Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union said:

"We should put our money into projects that are compatible with our decarbonisation objectives and the fight against climate change. This is important for the environment and the economy, but also for financial stability.”

“Between 2007 and 2016, economic losses from extreme weather disasters rose by 86%. The proposals presented today show that the European Union is committed to ensuring that our investments go in the right direction. They are about harnessing the vast power of capital markets in the fight against climate change and promoting sustainability."

The Commission said that more investments will now be channelled into sustainable activities thanks to the new rules that define the criteria to determine whether an economic activity is environmentally-sustainable.

All financial entities that manage investments on behalf of their clients or beneficiaries will now have to inform them about how their activities are impacting the planet or their local environment, anabling investors to make more informed investment choices.

Key features include giving better advice to clients on sustainability

Key features of the measures include:

• A harmonised EU-wide classification system ('taxonomy'): The proposal sets harmonised criteria for determining whether an economic activity is environmentally-sustainable. Step by step, the Commission will identify activities which qualify as ‘sustainable', taking into account existing market practices and initiatives and drawing on the advice of a technical expert group that is currently being set up.
• Investors' duties and disclosures: The proposed Regulation will introduce consistency and clarity on how institutional investors, such as asset managers, insurance companies, pension funds, or investment advisors should integrate environmental, social and governance (ESG) factors in their investment decision-making process. Exact requirements will be further specified through Delegated Acts, which will be adopted by the Commission at a later stage. Asset managers and institutional investors would also have to demonstrate how their investments are aligned with ESG objectives and disclose how they comply with these duties.
• Low-carbon benchmarks: The proposed rules will create a new category of benchmarks, comprising the low-carbon benchmark or "decarbonised" version of standard indices and the positive-carbon impact benchmarks. The new market standard should reflect companies' carbon footprint and give investors greater information on an investment portfolio's carbon footprint.
• Better to advice to clients on sustainability: The Commission has launched a consultation to assess how best to include ESG considerations into the advice that investment firms and insurance distributors offer to individual clients. This should help a broader range of investors access sustainable investments.

Jyrki Katainen, Vice-President responsible for Jobs, Growth, Investment and Competitiveness commented:

"To achieve the EU's 2030 climate targets, we need around €180 billion a year of additional investments in energy efficiency and renewable energy. Mobilising private capital to fund sustainable investment is essential. The European Fund for Strategic Investments (EFSI) is already crowding in private investments to achieve these goals.

“Today's proposals will increase transparency of sustainable finance and the investment opportunities it offers, so that investors have reliable information available to enable the transition to a low-carbon, resource-efficient and circular economy. "

According to the Commission, current levels of investment are not sufficient to support an environmentally-sustainable economic system that fights climate change and resource depletion.

More private capital flows need to be oriented towards sustainable investments to close the €180-billion gap of additional investments needed to meet the EU's 2030 targets of the Paris Agreement.