COMMISSION STAFF WORKING DOCUMENT EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment Proposal for a Regulation of the European Parliament and of the Council on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1011 on low carbon benchmarks and positive carbon impact benchmarks
Date: 2018-05-24
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: EU environmental policy, benchmarking, disclosure of information, economic activity, economic instrument for the environment, financial market, green economy, investment, reduction of gas emissions, sustainable development

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   EUROPEAN COMMISSION  Brussels, 24.5.2018 SWD(2018) 265 final  COMMISSION STAFF WORKING DOCUMENT  EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT  Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment  Proposal for a Regulation of the European Parliament and of the Council on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341  Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1011 on low carbon benchmarks and positive carbon impact benchmarks  {COM(2018) 353 final}  - {SEC(2018) 257 final}  - {SWD(2018) 264 final} - {COM(2018) 354 final} - {COM(2018) 355 final}  
 
 
Impact assessment on Sustainable Finance  

Executive Summary Sheet 

A. Need for action 

Why? What is the problem being addressed?  
Governments  from  around  the  world  chose  a  more  sustainable  path  for  our  planet  and  our  economy  by 
adopting the Paris agreement on climate change and the UN 2030 Agenda for Sustainable Development. The 
European  Union  is  leading  on  this  front,  and  thus  adopted  in  March  2018  an  Action  Plan  on  Sustainable 
Growth,  with  the  objectives  of  (i)  reorienting  capital  flows  towards  sustainable  investments,  (ii)  managing 
financial risks stemming from environmental challenges, and (iii) fostering transparency and long-termism in  
financial and economic activity. The actions assessed in this impact assessment and which were announced 
in this Action Plan are parts of a broader and further-reaching strategy to make the European economy truly 
sustainable. They will contribute to the Action Plan's objectives by addressing the following problems: 

1. 

institutional investors, asset managers, investment advisors and insurance distributors ("the relevant 
entities")  lack  incentives  to  consider  Environmental,  Social  and  Governance  (ESG)  factors  in  their 
investment  and  advisory  process,  notably  as  a  result  of  the  lack  of  clarity  and  coherence  of  EU 
legislation in that regard; 

2.  end-investors face high search costs a) to identify what constitute sustainable investments and b) to 
assess  the  extent  to  which  ESG  factors  are  integrated  in  the  financial  products  available  on  the 
market. 

What is this initiative expected to achieve?  
The specific objectives of this initiative are:  

1. 

2. 
3. 

to  ensure  clarity  and  a  coherent  approach  across  sectors  and  Member  States  as  regards  the 
integration of ESG factors by the relevant entities in their investment/advisory process;  
to increase transparency towards end-investors by improving ESG-related disclosure requirements;  
to provide clarity on what sustainable investments are and , by a) creating a EU framework setting out 
conditions for determining the environmental sustainability of investments -  this  classification system 
to be created at the EU level (also called  taxonomy)  will establish market clarity on which activities 
are 'green' or 'sustainable', and b) creating a new category of low-carbon and positive carbon impact 
benchmarks, based on a sound methodology, which will help investors compare the carbon footprint 
of their investments. 

What is the value added of action at the EU level?  
The financial entities that will be impacted by this initiative are mostly working across borders in the EU. That 
is the reason why legislation applying to those market players is largely harmonised at EU level. Action at EU 
level  to  integrate  ESG  factors  in  their  investment  decision/advisory  process,  increase  the  transparency 
towards  end-investors  and  provide  clarity  on  what  environmentally  sustainable  investments  are  will  thus 
ensure coherence, reduce fragmentation, and further improve the functioning of the single market.  EU level 
action  is  needed  to  deliver  on  the  common  EU  sustainable  development  objectives  and  the  sustainability 
targets set at global level. 

B. Solutions 

What  legislative  and  non-legislative  policy  options  have  been  considered?  Is  there  a  preferred 
choice or not? Why?  
Four  actions  are  assessed  by  this  impact  assessment.  After  considering,  for  each  of  them,  both  legislative 
and non-legislative options, the following preferred options were identified: 
   1. Investors duties  
Asset  managers,  insurance  undertakings,  insurance  distributors,  occupational  pension  funds,  investment 
advisors  and  individual  portfolio  managers  would  be  required  to  integrate  ESG  factors  in  the  investment 
decision and advisory process of as part of their investors' duties. This would provide clarity and consistency 
across the market, and mainstream sustainability in the investment decision making and advisory processes 
of these financial institutions, in particular in their risk management.  
   2. Disclosures 
The relevant entities would also have to disclose how they comply with these duties. In addition, those asset 
managers and institutional investors who claim to pursue sustainability objectives would have to demonstrate 

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alignment  of  their  investments  with  those  objectives.  This  would  increase  transparency  towards  end-
investors, ensure comparability between products, and discourage green-washing. 
    3. A unified EU classification system ('taxonomy'): 
The  preferred  option  would  set  uniform  criteria  at  EU  level  for  determining  whether  an  economic  activity  is 
environmentally  sustainable.  It  is  being  proposed  that  the  Commission  will  afterwards  identify  the  activities 
which  will  qualify  as  sustainable  while  drawing  on  the  advice  of  a  technical  expert  group  on  sustainable 
finance being set up. This should  provide economic actors and investors with clarity on which activities are 
considered green/sustainable in order to inform their investment decisions. This is a first and essential step in 
the efforts to channel investments into sustainable activities. 
   4. Benchmarks 
The  preferred  option  would  introduce  two  new  categories  of  low-carbon  and  positive  carbon  impact 
benchmarks. Harmonised minimum standards for the methodology used to develop these benchmarks would 
be defined. This will foster a market standard reflecting companies' carbon footprint. Doing so, it will provide 
investors who want to invest in low carbon strategies with a reliable tool. 

Who supports which option?  
Answers  to  the  public  consultation  on  investors'  duties  largely  support  an  intervention  at  EU  level  as  this 
would provide consistency and clarity to financial entities as to what is required. On disclosures, the majority 
of market participants confirmed that they should disclose how they consider sustainability factors within their 
investment  decision-making  process.  The  majority  of  the  stakeholders  which  shared  their  views  with  the 
Commission agreed that a taxonomy at EU level would be helpful to fulfil their investor duties and take into 
account ESG factors in their investment decision processes. 

C. Impacts of the preferred option 

What are the benefits of the preferred option (if any, otherwise main ones)?  
By  increasing  the  overall  transparency,  the  different  actions  will  reduce  the  asymmetry  of  information 
between end-investors, financial intermediaries and index providers. The initiative would reduce the current 
fragmentation of the market, notably in terms of methodologies for identifying environmentally sustainable 
activities/investments.  This  enhanced  transparency  and  harmonisation  will  increase  the  reliability  and 
attractiveness of and confidence in ESG financial products and foster innovation in investment strategies 
and  the  design  of  these  financial  products.  The  actions  will  also  help  mainstreaming  sustainability  into  risk 
management  and,  combined  with  the  other  measures  of  the  Action  Plan,  result  in  the  growth  of  the 
European  sustainable  finance  market.  Overall,  the  actions  will  contribute  to  the  reorientation  of  capital 
flows towards sustainable investments and hence to the objective of fostering a sustainable economy. This 
would support the far-reaching sustainable transformation envisaged by the environmental policies already in 
place at EU and Member State levels. 

What are the costs of the preferred option (if any, otherwise main ones)?  
The costs for the relevant entities of integrating ESG factors in the investment decision and advisory process 
and  improving  ESG-related  disclosures  are  expected  to  remain  relatively  limited,  if  done  in  a  standardised 
way. For those financial institutions which already have developed a taxonomy, the use of the EU taxonomy 
might entail costs - although these are likely to be lower than the  savings derived from maintaining an own 
taxonomy or using various different taxonomies, and in any case lower than the benefits expected from using 
this  taxonomy.  For  index  providers,  creating  new  categories  of  low-carbon  and  positive  carbon  impact 
benchmarks  will  generate  limited  costs  as  it  provide  minimum  standards  for  the  methodologies  to  develop 
these benchmarks. 

How will businesses, SMEs and micro-enterprises be affected?  
The  preferred  options  will  indirectly  impact  businesses  as  issuers  of  securities  by  incentivizing  them  to 
disclose  the additional  ESG  information  necessary  for  financial  intermediaries  and  investors.  Starting  2018, 
the  Directive  on  disclosure  of  non-financial  information  already  requires  large  listed  companies  as  well  as 
non-listed banks and insurance companies to disclose material sustainability information. For issuers not in 
the scope of this Directive (including SMEs), this incentive to disclose additional information will come with a 
cost.  Nevertheless,  this  disclosure  should  also  enable  those  issuers  to  access  additional  investors  and 
potentially reduce the cost of capital. 

Will there be significant impacts on national budgets and administrations?  
Significant  impacts  on  national  budgets  and  administrations  are  not  expected,  because:  (i)  to  a  very  large 
extent,  the  legislative  requirements  will  have  to  be  implemented  by  market  participants,  and  (ii)  monitoring 
requirements will be limited.  

Will there be other significant impacts?  

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Major impacts already described in the benefits section. 

D. Follow up 

When will the policy be reviewed?  
Ex-post evaluation is envisaged five years after the implementation of the measures, to assess, among other 
things, how effective and efficient the measures have been in terms of achieving the objectives presented in 
this impact assessment and to decide whether new measures or amendments are needed. The Commission 
will measure progress through general key performance indicators for every action covered by this initiative. 

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