Fine-tuning needed to ensure investors contribute to the European Green Deal

Contribution to the Eurofi Magazine - September 2022

There is no question that urgent action is required to address climate change and that environmental protection should be integrated into economic growth strategies. In the financial sector, insurance and pension funds have the longest investment time horizons and hence the greatest stake in sustainability. It is also necessary to ensure that retail investors can invest and save sustainably, and participate in the transition to a greener economy. 

EIOPA believes that the policy framework put in place is sensible to achieve these goals. The Corporate Sustainability Reporting Directive (CSRD) establishes reporting requirements for issuers, the Sustainable Finance Disclosure Regulation (SFDR) establishes disclosure requirements for financial market participants. In addition, the Insurance Distribution Directive (IDD) requires advisers to integrate sustainability preferences as part of the suitability assessment and there are other initiatives at play, such as EU Ecolabel and Green Bonds. The EU Taxonomy provides common definitions for those economic activities that can be considered environmentally sustainable – the basic language to communicate information on sustainability.

Yet sustainable investing – and reporting – is a complex and sometimes challenging path to navigate.

Insurers, insurance intermediaries and pension funds are required to disclose principal adverse impacts of their investments under the SFDR. They are also required to provide details of the objectives of the products and pension schemes that they make available.

Data is one of the critical factors. In particular, corporate data is crucial to ensure that insurers, pension funds and other financial market participants can screen their investments and report on social and environmental indicators, including the principle adverse impact indicators. However, one difficulty for the insurance sector is that the deadlines for disclosure for insurers precede the deadlines for reporting of company-reported data. EIOPA considers it essential insurers already start with disclosing responsibly, despite the challenges in doing so in the absence of the CSDR being in force. This pragmatic approach allows insurers to make a serious best effort, while supervisors monitor this effort and the progress made in the first year of the SFDR, while recognising the existing limitations.  

Besides insurers, retail investors also face challenges. Most sustainability-related products currently being sold fall under Article 8 of the SFDR – ‘a Fund which promotes, among other characteristics, environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.’ This is a broad definition and consumers may not always be aware that this category covers products with a low sustainability ambition.  For consumers seeking a product with a high level of ambition, they might not find anything suitable within the current market offer. 

And while there is a need for more information, there is also the potential for information overload. Will consumers really read the soon-to-be seven pages of information on sustainability that comes on top of the basic disclosure on the product? The volume of information is one element, but there is also the complexity. Will consumers understand the technical terms? When seeking advice, will they be able to answer questions from advisors on sustainability preferences?

EIOPA is working to address these issues. For example, when it comes to preferences, EIOPA recently published guidance on integrating the customer’s sustainability preferences in the suitability assessment under the IDD. The guidance includes how to help customers better understand the concept of ‘sustainability preferences’ and their investment choices; how to collect information on sustainability preferences; and how to match customer preferences with products, based on product disclosures under the SFDR.

With regard to the Corporate Sustainability Reporting Directive (CSRD), EIOPA welcomes the political agreement reached by the co-legislators. Companies need to know to what extent they are responsible for climate change and other sustainability impacts, as well as identify the costs for them that result from sustainability changes. Overall, increased transparency in sustainability reporting from companies is needed to more effectively promote investor protection and combat greenwashing. Increased transparency will also help to detect ESG-related risks which may undermine financial stability and to support the EU’s ambition to enact an effective transition towards a more sustainable economic and financial system. 

EIOPA recognises the challenges that financial market participants and retail investors face with sustainable investing and reporting. But greening the economy is non-negotiable and EIOPA will make every effort to support the insurance and occupational pensions sectors in achieving this goal.

Thanks to Ursula Bordas for her contribution to this article.