Many new sustainability rules are being introduced and will be in place in the near future. It's time to do your research and start the adaptation work that will need to be carried out. Kawin Mårtensson and Lina Sandmark, Kompass Advokat, are specialists in regulatory issues in the financial sector and will in this article go through some of the upcoming sustainability rules.
Sustainability focus in the financial sector
Sustainability remains a hot topic, especially in the financial sector. Politicians and decision-makers have identified the financial industry as a suitable and efficient industry to drive change. The reasons are simple. In addition to solid knowledge and good access to resources, there is a great tendency to change and adapt in the industry. In addition, financial institutions have opportunities to influence large parts of society through e.g. significant investments.
A plethora of new requirements will be introduced both through completely new regulations as well as updates and changes being made to existing ones. Although the new rules have generally not yet begun to be applied, and a number of rules remain to be finally formulated and established, there is every reason to begin mapping out the rules and the adaptation work that will need to be carried out. This is a prerequisite for being able to become an industry role model in the area of sustainability and benefit from the sustainability issue in its marketing.
What has previously been relatively problem-free for companies to claim - in terms of climate and sustainability proactiveness - is about to change. With the new regulations, requirements will be set in a completely different way than before, and it will no longer be possible to claim that you have sustainable products if the requirements are not fulfilled.
What are the new rules?
Some of the forthcoming sustainability regulations being introduced, are the Disclosure Regulation, the Taxonomy Regulation and the Benchmark Regulation. For the insurance industry, revisions of the Solvency II regulations and the IDD regulations are also planned. Below is a summary of the adjustments that need to be made due to the new and revised regulations.
The Disclosure Regulation is first in line and will mainly be applied in March 2021. The purpose of the regulation is for organizations in the financial sector to provide information on how they work with sustainability issues, how sustainability risks are integrated into investment decisions and considered in relation to the company's products, e.g. through information on the website and in the periodic reporting.
The Taxonomy Regulation is a tool that will ensure that the financial sector has common rules, for which investments are to be considered green and sustainable. The European Commission has set six climate goals, e.g. adaptation to climate change and circular economy. In order to be classified as environmentally sustainable, an organization must contribute significantly to at least one of the goals without damaging any of the other goals.
"Lina Sandmark, Kompass Advokat"
"Kawin Mårtensson, Kompass Advokat"
The Benchmark Regulation began to be applied in 2018, in its original version. On November 27, 2019, a new regulation was issued which entails major changes to the existing Benchmark Regulation. The changes refer to reference values for climate change and sustainability. Among other things, EU reference values for adaptation to the Paris Agreement was added.
The European Commission has asked EIOPA to comment on the changes that may need to be made to the Solvency II regulations due to sustainability and climate change. EIOPA has presented its positions and advice in various reports. EIOPA mentions a number of areas that need to be revised, both within Pillar I and Pillar II. In Pillar II, it is mentioned that sustainability and sustainability risks shall be taken into account in, for example, the risk management system, ORSA and steering documents such as technical provisions and investment risks.
The technical advice provided by EIOPA on April 30, 2020, at the request of the European Commission, also included revisions to the IDD regulations. Among other things, it is proposed that sustainability issues shall be explicitly covered by and integrated into the product approval process, target market, product testing, monitoring/review of products and distribution channels.
Where to begin?
To be able to start adapting to the new sustainability rules, you need to obtain an overview of which the new and revised rules.
Furthermore, you need to make a survey of how the new rules affect the business, what requirements the business lives up to and which gaps you need to fill. Only then can structures and routines be implemented or adjusted in accordance to the new regulatory requirements and, at the same time, adapted to the company's own corporate governance system and operations. Based on this, the company can create an organization and a culture that enables a wide range of sustainable insurance products, which customers increasingly see as a matter of course, e.g. for capital investments and occupational pension savings.