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EC steps up effort on green finance and climate disclosures

The European Council has announced two proposals that aim to bring finance more in line with the objectives of the Paris agreement on climate change:

  • a proposal introducing disclosure obligations on how financial companies integrate environmental, social and governance factors in their investment decisions;
  • a proposal creating a new category of financial benchmarks aimed at giving greater information on an investment portfolio's carbon footprint.

Hartwig Löger, minister for finance of Austria, which currently holds the Council presidency, said: “The EU is fully committed to achieving the targets set by the Paris agreement. Cutting greenhouse gas emissions requires investment. It is crucial that capital markets pay their fair share in channelling funding towards projects and companies that contribute to making our economy more sustainable.”

The draft text requires institutional investors to disclose:

  • the procedures they have in place to integrate environmental and social risks into their investment and advisory process;
  • the extent to which those risks might have an impact on the profitability of the investment;
  • where institutional investors claim to be pursuing a "green" investment strategy, information on how this strategy is implemented and the sustainability or climate impact of their products and portfolios.

The proposed regulation should in practice limit possible "greenwashing" – i.e. the risk that products and services which are marketed as sustainable or climate friendly in reality do not meet the sustainability/climate objectives claimed to be pursued.

The Council also said it supports proposals from the European Commission to establish two new financial benchmarks:

  • low-carbon benchmarks, which aim to lower the carbon footprint of a standard investment portfolio.
  • positive-carbon impact benchmarks, which have the more ambitious goal to select only components that contribute to attaining the 2°C set out in the Paris climate agreement.

Towards climate-related financial disclosures

These proposals are in line with the goals of the Task Force on Climate-related Financial Disclosures (TCFD). In its status report, dated September 2018, the TCFD stated that, while the majority of companies already disclosed information that is aligned with certain elements of the TCFD recommendations, “further work is needed for disclosures to contain more decision-useful climate-related information”. It added: “To date, relatively few companies disclose the financial impact of climate change on the company. Information on the resilience of companies’ strategies under different climate-related scenarios is also limited. Disclosure is most prevalent in sustainability reports and not yet integrated in financial filings as recommended by the Task Force.”

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