Euro regulators push for clearer sustainable finance definitions

A powerful alliance of European Union financial regulators is stepping up pressure for clearer definitions of sustainable finance that it argues are needed to support the green transition and boost consumer protection.

The European Insurance and Occupational Pensions Authority (EIOPA), European Banking Authority and the European Securities and Markets Authority have joined forces under the umbrella of the European Supervisory Authorities (ESAs) to issue a rare joint opinion reviewing the working of the Sustainable Finance Disclosure Regulation, writes Contrbuting Editor David Worsfold.

Underlying this co-operation is a shared ambition to align the definitions used across the finance sector, especially when it comes to transition finance which they argue currently lacks any clarity. The regulators say they need this clarity to enable them to prevent abuse and facilitate effective enforcement.

It comes in the wake of moves earlier this year by EIOPA to clampdown on misleading claims by insurers and pension funds about the green credentials of products and investments which provoked a robust push back from insurers. With the three financial regulators now working together the prospects for action on perceived abuses is more likely.

Visual representation of sustainability indicatorAmong the key recommendations from the ESAs to the European Commission is a proposal for the introduction of a sustainability indicator that would grade financial products such as investment funds, life insurance and pension products.

Among the specific areas of concern they are already focussing attention on is the use of internal methodologies by general insurers to verity sustainability claims. This is a priority for EIOPA. There are also concerns about the potential for greenwashing within pension funds, although EIOPA officials are reluctant to quantify or explain what they have found. 

The regulators say that without genuine supervisory convergence there could be scope for gaming different national regimes. The need to avoid this is a key theme of their recommendations. With a peer review of national regulators scheduled for next year the ESAs are making it clear that consistency of implementation of directives in this area will be a top priority.

They say the solution is to focus on ways to introduce simple and clear categories for financial products. The simplifications should be built around two voluntary product categories, “sustainable” and “transition”, that financial market participants should use to ensure consumers understand the purpose of the products. The rules should have a clear objective and criteria to reduce greenwashing risks.

Among the key recommendations in the joint opinion are:

  • appropriate disclosures for products outside the two categories to reduce greenwashing;
  • improvements to the definition of sustainable investments;
  • simplification of the way disclosures are presented to investors;
  • other technical suggestions including on which products should fall under the scope of SFDR and on how to improve disclosures regarding the negative impact of investments on people and the environment; and
  • the need for conduct consumer testing before putting forward any policy proposals to review the SFDR, such as to introduce a categorisation system and/or an indicator.

These proposals will be waiting in the in-tray of the new Commission once the political wrangling in the wake of the recent elections to the European Parliament are concluded.

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