Global Trustee and Fiduciary Services News and Views Issue 50

Global Trustee and Fiduciary Services News & Views | Issue 50 | 2018 25 This first phase of the sustainability package aims to introduce proposals on: Disclosure Under current rules, financial entities that receive a mandate from their clients or beneficiaries to make investment decisions on their behalf, or to provide recommendations to their clients, have the duty to act according to those same people’s best interests and expectations, as well as in compliance with the mandate they have received. 4 The Commission proposes a harmonised-EU approach to the integration of ESG risks and opportunities in the procedures of institutional investors, asset managers, insurance distributors and investment advisers, as part of their duty to act in the best interest of clients. 5, 6 It also sets out uniform rules on how these “financial market participants” should inform investors about their compliance with the integration of ESG risks and opportunities. The definition of financial market participant is extensive and captures the following: • Asset managers regulated under the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS Directive). 7 • Managers regulated under the Alternative Investment Fund Managers Directive (AIFMD). 8 • Investment advisors and individual portfolio managers regulated under the Markets in Financial Instruments Directive (MiFID II). 9 • Insurance undertakings which make available insurance-based investment products and insurance products, made available to professional investors, offering a maturity or surrender value and where that maturity or surrender value is wholly or partially exposed, directly or indirectly, to market fluctuations (PRIIPs). 10 • Managers of qualifying venture capital funds registered under the European Venture Capital Funds Regulation. 11 • Managers of Qualifying Social Entrepreneurship Funds. 12 • Institutional investors, namely insurance undertakings regulated under Solvency II, and occupational pension funds regulated under the Institutions for Occupational Retirement Provision Directive (IORP II). 13 • And insurance distributors regulated under the Insurance Distribution Directive (IDD). 14 The proposed rules cover all financial products offered and services provided by the afore- mentioned entities, regardless of whether they pursue sustainability investment objectives or not. 15 The Commission proposal requires disclosure of: • The procedures financial actors have in place to integrate ESG risks into their investment and advisory process. • And the extent to which ESG risks are expected to have an impact on the returns of the product or service provided, irrespective of whether or not sustainable investment objectives are pursued. Taxonomy The introduction of an EU environmentally sustainable taxonomy would identify which and to what degree economic activities can be considered environmentally sustainable. 16 It would determine the conditions that those economic activities would need to comply with to positively contribute to at least one of the six EU environmental objectives as set out in the Regulation: 1. Climate change mitigation. 2. Climate change adaptation. 3. Sustainable use and protection of water and marine resources. 4. Transition to a circular economy, waste prevention and recycling. 5. Pollution prevention and control. 6. And protection of healthy ecosystems. Why the proposal? Market-based initiatives and national practices that are not generally developed in a coherent manner may give rise to divergent classifications, as they pursue national policy agendas targeting only relevant aspects for the local industry. Fragmentation is confusing for investors, especially retail investors who would like to invest more in sustainable activities. The practice of financial products being marketed as “green” or more generally “sustainable”, known as “greenwashing”, leads to misunderstanding that such products may not meet basic environmental standards.