In March 2018, the European Commission released an action plan for financing sustainable growth, which includes ten key reform areas aiming to reorientate capital flows towards sustainable investment, mainstream sustainability into risk management, and foster transparency and long-termism in financial and economic activity.

The ten actions are discussed below:

• Action 1 – Sustainability taxonomy: establishing a framework to facilitate sustainable investment, aiming to create an evolving and unified classification system on what may be considered environmentally sustainable economic activities. The first taxonomy will focus on climate mitigation activities, and will later be expanded to climate adaptation and other environmental activities, as well as social sustainability.
• Action 2 – EU-wide standards and labels: exploring the use of the EU Ecolabel Regulation when the sustainable taxonomy is more developed. Aims to protect integrity, trust and confidence in sustainable finance products.
• Action 3 – Fostering investment in sustainable projects: implementing measures to improve the efficiency and impact of instruments aimed at sustainable investments in the EU. These will particularly build on existing initiatives to mobilise investment in sustainable infrastructure, like Investment Plan for Europe, the European Fund for Strategic Investments (EFSI).
• Action 4 – Incorporating sustainability when providing financial advice: In particular, regulated investment and insurance firms will be required to ask retail clients about environment, social and governance (ESG) preferences, as well as offer advice on ESG objectives.
• Action 5 – Developing sustainability benchmarks: amending existing benchmark regulation, as well as creating two new benchmarks. The first low-carbon benchmark will be based on a standard ‘decarbonising’ benchmark. The second positive-carbon benchmark will include stocks that are judged to be aligned with the Paris Agreement objective of limiting global warming to below 2°C.
• Action 6 – Better integrating sustainability ratings and market research: exploring the merits of amending the Credit Rating Agency Regulation to mandate credit rating agencies to explicitly integrate sustainability factors into their assessment. Including an assessment of the current extent of ESG considerations in credit ratings, as well as a guideline on disclosure of environmental and social sustainability information for credit rating agencies.
• Action 7 – Clarifying institutional investors’ and asset managers’ duties: introducing regulation containing the obligation of asset managers, insurance distributors, investment advisers and institutional investors to integrate ESG factors into their decision-making processes. The integration of ESG risks and opportunities will be viewed as part of their duty to act in the best interest of clients.
• Action 8 – Incorporating sustainability in prudential requirements: including risks associated with climate and other environmental factors in institutions’ risk management policies as part of the prudential framework.
• Action 9 – Strengthening sustainability disclosure and accounting rule making: assessing whether public reporting requirements for listed and non-listed companies are fit for purpose.
• Action 10 – Fostering sustainable corporate governance and attenuating short-termism in capital markets: assessing the possible need to require corporate boards to develop and disclose a sustainability strategy, and clarify the rules according to which directors are expected to act in the company’s best interest.

The Commission published regulatory proposals concerning taxonomy (1), benchmarks (5), investment advice (4), and investor duties (7) in 2018. These proposals will next work their way through the European Parliament and Council.

1. Actors in the EU-regulated financial industry should find this report useful in navigating the ten actions. As the Commission has committed to a timeline of implementation, and already published four legislative proposals (May 2018), actors need to be aware of the impacts these reform areas may have not only on their own products/services, but also on the future of the industry.
2. The sustainability taxonomy is expected to bring consistency and clarity in green and sustainability definitions used throughout the EU. This uniform classification system may have several uses. First, as the first essential step in the overall effort to channel investment into sustainable activities in the single EU market. Second, acting as a guidebook for national labelling schemes for green financial products. Third, as a reference point for financial market participants to develop green financial products. Finally, reduce greenwashing.
3. To help attract capital to sustainable projects, the Commission may establish a single investment fund integrating all EU market-based instruments. A fund like this could support investment priorities and simplify interactions between investors, beneficiaries, the European Commission, the European Investment Bank and commercial banks.
4. Asset managers and institutional investors that market products as pursuing low-carbon objectives will be required to designate an appropriate benchmark, like the EU low- or positive-carbon indices, as reference. If no relevant index reflecting the asset manager’s low-carbon strategy exists, he or she is required to provide a detailed explanation of how they intend to ensure continued adherence to the low-carbon objective. These requirements link the initiatives on investors’ duties (action 7) and benchmarks and disclosures (actions 5 and 9).
5. The amendment to regulations concerning investors’ duties and disclosure will make it mandatory for asset managers and institutional investors to not only integrate ESG factors in their investment decision processes, but also disclose how this is done. Furthermore, participants labelling financial products/services as environmentally sustainable will also be required to disclose how and to what extent the criteria set out in the sustainability taxonomy (action 1) are used to determine the environmental sustainability marketed for the product/service.
6. Current EU prudential frameworks do not discriminate between green and brown investments, and thus ignore long-term risks and costs associated with exposure to climate change. Incorporating environmental risks in these frameworks may not only enhance future financial stability, but also incentivise banks and insurers to shift their longer-term investments into sustainable assets.
7. Yet companies listed in the EU are currently required to disclose information on material sustainability risks, the Commission aims to establish a framework that can be used to judge whether the public reporting requirements meet their objectives. However, these guidelines are non-legislative, apart from the disclosures on how asset managers and institutional investors use ESG factors (action 7).
   
8. Action 10 is non-legislative, but aims to target concerns regarding corporate culture in the financial sector and the need for it to be better aligned with long-term considerations. Thus, sustainability is desired to be embedded in corporate governance rules and duties of directors according to a list of potential actions presented by the High-Level Expert Group (HLEG) on Sustainable Finance.