Global Trustee and Fiduciary Services News and Views Issue 50

Prime, Futures and Securities Services | Sustainability and ESG 26 What economic activities should be considered as being environmentally sustainable? In order to qualify as environmentally sustainable, economic activities would have to fulfil all of the following requirements: • Contribute substantively to at least one of the six environmental objectives laid out in the proposal. • Not significantly harm any of the other environmental objectives. • Be carried out in compliance with a number of minimum social and governance safeguards. • And comply with specific technical screening criteria. The environmental taxonomy will be established in two stages: Positive-carbon impact benchmark: more ambitious, as this version will be aligned with the second Paris Agreement objective. The underlying stocks will be selected on account of their carbon emission savings exceeding the stocks’ residual carbon footprint. This is the only type of benchmark that would be compliant with the 2° Celsius objective in the Paris Climate Agreement. Benchmark administrators who produce ESG benchmarks should disclose how they take account of environmental, social and governance considerations. These proposals also contain an associated Annex, which looks at the methodologies and associated changes for both of the new benchmarks. 18 Suitability MiFID II and IDD require investment firms and insurance distributors to obtain the necessary information about clients’ investment objectives prior to providing products. Currently, firms do not always assess investors’ non-financial preferences, such as their preferences concerning environmental and social impacts of the investment. A public consultation has been launched as part of the overall sustainability package proposing amendments to MiFID II and IDD delegated acts. 19, 20 These would require investment firms and insurance distributors to ask their clients about their preferences as regards ESG, and then take them into account when advising their clients, as part of the product selection process and the suitability assessment. Based on these delegated acts, the Commission will invite ESMA to include provisions on sustainability preferences in its guidelines on the suitability assessment. These should be updated by Q4, 2018. The proposals above present only the first series of actions. The sustainable action plan from March 2018 also contains further actions that the Commission will take between now and the end of its current five-year mandate in 2019. In particular the Commission supports proposals for a Green Supporting Factor to boost green investments and loans, and incorporating sustainability into prudential requirements and corporate governance. On 29 May 2018, European Parliament MEPs backed a resolution on the proposals, supporting this by 455 votes to 87. 21 Proposals for the Regulation adopted 24 May 2018 Delegated acts providing details on the technical screening criteria Done on the basis of advice from the technical expert group established by the Commission 1 2 Once the taxonomy is developed, it will need to be used by regulators at both national and EU-levels when setting out requirements for market participants and also by market participants themselves when offering financial products as being environmentally sustainable. The proposal does not prescribe what to invest in, but creates incentives to invest in green activities. The operational part of the Regulation and the detailed taxonomy will not apply until six-months after the adoption of the relevant future delegated acts by the Commission. These are not due for completion until 2022. Benchmarks The Commission has proposed to create new categories of benchmark, comprising low-carbon and positive-carbon impact benchmarks. 17 These will be defined by amendment to the existing Benchmark Regulation. Low-carbon benchmark: based on “de- carbonising” a standard benchmark (e.g. an equity index like the S&P 500). Underlying stocks would be selected on account of their reduced carbon emissions, when compared to stocks constituting a standard benchmark.