The 10 key action points ultimately aim to reorient capital flows towards a more sustainable economy, foster long-termism and manage the increasing importance of sustainability risks.
The main legislative proposals refer to two new regulations (Taxonomy Regulation and the EU Regulation on sustainability-related disclosures in the financial services sector (SFDR)) as well as amendments to various existing regulations (e.g. MiFID II, IDD, UCITS, AIFMD, Benchmark Regulation). The EU is the first to establish a taxonomy but will not be the last. Other regulators are currently investigating the idea to leverage the work that has been done on the EU Taxonomy so the NGFS is working towards coordinating globally consistent taxonomies.
The SFDR entered into force in December 2019. In current EU Action Plan projects, this piece of regulation must be tackled first as certain key provisions will already have to be implemented by 10 March 2021. The Disclosure Regulation is supplemented with further details in regulatory technical standards (RTS) that have been developed by the three European Supervisory Authorities (ESAs), i.e., EBA, EIOPA and ESMA. In April 2020, the ESAs issued a consultation regarding their proposed draft RTS about content, methodologies and presentation of disclosures which was open for response until 1 September 2020 and has received a lot of pushback from the asset management industry especially with regard to the extent of transparency on the investment footprint on entity and product level, the lack of ESG data available from corporates and the fact that there will only be very little time to implement the provisions once the RTS are finalized.
Need for action in Switzerland?
While the legal initiatives of the EU Action Plan relate directly to entities in the EU, they also have an indirect impact on entities outside of the EU, especially those wishing to manufacture or sell financial products to EU clients. There is no harmonized third country access regime defined by any of the EU Action Plan regulations and various activity triggers apply. Swiss asset managers should be careful when promoting ESG under the new strict marketing regime in Europe.
Basically, the EU Action Plan applies to all EEA based financial market participants and financial advisors. Typically, funds are introduced in the EEA market before they are repatriated to Switzerland. In such constellations, the EU Action Plan also applies directly. In other circumstances the direct exposure of Swiss entities depends on triggers like the management of EEA funds and the active distribution of financial products in the EEA.
Depending on an institution’s ESG ambitions, their clients’ expectations or their regulatory obligations, there may also be indirect impacts. Finally, it must be considered that, with the EU Action Plan, the EU acts as a global industry standard setter – whether or not these standards become mandatory in Switzerland.
Summary
A lot is happening in sustainable finance at the regulatory level. While many asset managers and investors will welcome these developments as a force for good, timing of the EU Action Plan is tight. Financial market participants should closely observe changes across international and local sustainable finance legislation in order to offer leading – and fully compliant – products and services in short, medium and long term. Given the quick-paced EU developments, ESG market players cannot assume that leading today will necessarily mean leading tomorrow.
