The European Commission has proposed giving the European Supervisory Authorities broader powers to determine what represents environmental, social and governance investment and to monitor banks’ activities in this field.
The idea was included in this week’s package aimed at strengthening the supervision powers of the European Securities Markets Authority, the European Insurance and Occupational Pensions Authority and the European Banking Authority.
The objective, outlined in a communication presented on Wednesday (20 September), is to bring more efficiency to the capital markets union Europe is trying to set up, and avoid regulatory arbitrage especially in the aftermath of Brexit.
The communication pointed out that it is “indispensable” to reorient private capital to ‘green investment’.
“This requires a comprehensive, deep rethinking of the current financial framework and a different risk-return approach of capital markets and investors,” the document said.
At this stage, the executive considers that the ESAs could play a larger role in monitoring the development of this sector.
The Commission wants the authorities to take into account more environmental, social and governance factors within their mandate.
As an example, the regulators could control how financial institutions “identify, report and address” these factors in order to strengthen “financial viability and stability”.
The three bodies could also recommend the optimal way to include sustainable considerations in EU legislation.
The Commission wants the co-legislators to approve this proposal “as a matter of priority”, so they could enter into force before the end of this mandate in 2019.
In parallel, the institution will present in early 2018 an “ambitious” action plan on sustainable finance with new regulatory measures.
This week’s proposal followed the High-Level Expert Group’s interim report on this issue.
The group concluded that environmental, social and governance risks were not “properly integrated” in the financial sector’s investment assessment.
The report pointed out that the ESAs could play an important role in creating a regulatory and supervisory framework to support green investment while ensuring financial stability.
The high-level group also proposed a classification system for sustainable assets and a system for their labelling.
Finance Watch, an NGO, said the EU should not leave the labelling to the market but “should take the lead in creating a set of precise and democratically agreed criteria for assessing financial assets on environmental, social and governance grounds.”
This is one of the main concerns for civil society organisations and some MEPs, as they warn that some investments labelled as sustainable finance fail to meet some minimum principles.
The Commission also wants the three supervisory authorities to play a bigger role in shaping the development of digital companies in the financial sector (FinTech)
National regulators are relaxing the legislation these startups must comply with at small scale (sandboxes), in order to finetune the existing rules or come up with new ones.
While national authorities try different solutions to minimise the potential financial and security risks without killing this booming sector, the Commission wants “at least a minimum of convergence” in the ongoing work of these sandboxes, an official explained.
If the experiments are too different, it would be more difficult to harmonize the national approaches down the road, the official added.
The executive also proposed that the national authorities exchange best practices. Furthermore, the ESAs could issue guidelines and recommendations, when they consider appropriate, to guide the development of FinTech.
The Commission will present early next year an action plan that will set for the first time its approach to regulating FinTech, including innovative products like Bitcoin, a cryptocurrency based on the promising blockchain technology.
An option that is gaining ground is the possibility to issue such startups with EU-wide passports so they can operate across the bloc more easily.
Commission Vice-President for financial services, Valdis Dombrovskis, said the passports could work for targeted areas such as crowdfunding or peer-to-peer lending.