Abstract
Building a common EU framework for sustainable finance undoubtedly implies the integration of sound and sustainable processes and skills across the whole structure and governance of financial institutions. Consequently, a new financial paradigm is going to be needed, which will require the strengthening of investor care and protection, so contributing to the restoration of trust in the financial sector. In particular, on 18 December 2018, the European Securities and Markets Authority (ESMA) launched two public consultations on draft technical advice for the integration of sustainability risks and factors into the Directive on Markets in Financial Instruments (MiFID), the Alternative Investment Fund Managers Directive (AIFMD), and the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) regimes, with the aim to clarify the so-called fiduciary duties and to increase transparency in the financial services industry. However, the success of the EU initiatives on investor protection regulation may be seriously endangered by the existence of many challenges, weaknesses, and contradictions raised by economists and stakeholders in relation to the definition of sustainability, ESG data availability and reliability, the development of an EU taxonomy, conflicts of interest, product governance, and suitability assessment. This paper starts by briefly analyzing the recent developments of the regulation of sustainable finance at the global level, then offers a more detailed view on the establishment of a common regime on sustainable finance in the EU, with particular reference to the action plan ‘Financing Sustainable Growth’. Then, it examines the recent proposals for regulation on sustainable finance, specifically considering the barriers to the integration of sustainability risks and factors in the EU investor protection regulation—with particular reference to investment services—with respect to its four main dimensions: (1) disclosure of product information, (2) conduct of business (COB) rules, (3) product governance and intervention, and (4) financial education. The paper concludes that the EU reforming proposals, though admirable, risk oversimplifying a complex issue that cannot be easily solved without considering its practical implications on each category of financial operators in the performance of different financial services.
Highlights
Nowadays, sustainability is one of the most challenging global issues, affecting individuals and organizations, both those operating in the financial and non-financial sector, from small- and medium-sized enterprises (SMEs) to large commercial companies and governmental institutions
It examines the recent proposals for regulation on sustainable finance, considering the barriers to the integration of sustainability risks and factors in the EU investor protection regulation—with particular reference to investment services—with respect to its four main dimensions: (1) disclosure of product information, (2) conduct of business (COB) rules, (3) product governance and intervention, and (4) financial education
European Securities and Markets Authority (ESMA) proposed the addition of a new recital 59bis, concerning conflict of interests, to the MiFID-delegated regulation, which requires that “when identifying the types of conflicts of interest whose existence may damage the interests of a client, investment firms should include those that may stem from the distribution of environmentally sustainable investments, social investments or good governance investments” and that “firms should have in place appropriate arrangements to ensure that the inclusion of ESG considerations in the advisory process and portfolio management does not lead to mis-selling practices”
Summary
Sustainability is one of the most challenging global issues, affecting individuals and organizations, both those operating in the financial and non-financial sector, from small- and medium-sized enterprises (SMEs) to large commercial companies and governmental institutions. This paper starts by briefly analyzing the recent developments of the regulation of sustainable finance at the global level, offers a more detailed view on the establishment of a common regime on sustainable finance in the EU, with particular reference to the action plan ‘Financing Sustainable Growth’. It examines the recent proposals for regulation on sustainable finance, considering the barriers to the integration of sustainability risks and factors in the EU investor protection regulation—with particular reference to investment services—with respect to its four main dimensions: (1) disclosure of product information, (2) conduct of business (COB) rules, (3) product governance and intervention, and (4) financial education
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