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European Commission - Speech - [Check Against Delivery]

Vice-Presidents Dombrovskis' and Katainen's remarks at the press conference on the new measures to further strengthen the Capital Markets Union and the Banking Union

Brussels, 24 May 2018

Vice-President Dombrovskis

Good morning, and thank you for coming to this press conference.

The European Commission is presenting seven new proposals on European financial markets today, so we have a full programme.

Let me start with our proposal to enable sovereign bond backed securities, or SBBS. This is a risk reduction measure. SBBS are a low-risk financial product that would be backed by a bundle of the 19 euro-area government bonds.

If the market for SBBS takes off, it could help the private sector better diversify risks across borders. And therefore, SBBS would further weaken the bank-sovereign loop, which was at the heart of the crisis.

To issue this product, private market actors, such as banks, would buy euro-area Member States' bonds on the market, package them, and resell them as SBBS. What our proposal does is to enable them to carry out this process and issue these securities - should they wish to do so.

Before moving on, let me clarify some basics:

  • first, SBBS do not imply any mutualisation of risks or losses among Member States;

  • second, our proposal will not change anything about the regulatory treatment of sovereign debt, and

  • third, countries will continue to issue their own debt – so no change here. In fact, the experts at the European Systemic Risk Board in Frankfurt have concluded that SBBS would not negatively affect existing bond markets.

Today, bond investors have a strong home bias: for every euro they invest in their own Member State, they only invest about 40 cents in bonds from other Member States.

So why does the market not issue such products already today?

One of the main obstacles to issuing SBBS is the current regulatory framework, which treats them more strictly than stand-alone government bonds. But this is not justified from a financial stability point of view. Our proposal therefore seeks to grant SBBS the same regulatory treatment as euro area sovereign bonds, including in terms of capital requirements.

A market for SBBS could benefit both the Banking Union and the Capital Markets Union, and therefore also strengthen the Economic and Monetary Union. SBBS remain a new product, and whether they succeed in the market is an open question. But with this proposal, we want to give SBBS a chance.

The second proposal is about helping small and medium enterprises to list and issue stocks and bonds on public markets. This is associated with additional growth and job creation. Today, out of 20 million SMEs in Europe, only about 3,000 are listed on stock-exchanges, so we see that there is a scope for growth. 

We have already revised some EU rules to reduce the regulatory burden on SMEs and help them raise capital, for example with new Regulations on prospectuses and venture capital. But EU laws still do not sufficiently differentiate between larger and smaller companies. With today's initiative we are simplifying rules for SMEs listed on SME Growth Markets, which are a specific category of trading venue dedicated to small issuers. At the same time, we are safeguarding a high level of investor protection and market integrity. 

Let me now turn to sustainable finance. 

This is the right moment to lay the ground for this policy. When it comes to climate change, we are running out of time: the Titanic could not turn to avoid the iceberg at the last minute, and we will soon be in a very similar situation. Therefore, we should not wait until the last minute, but act now, and the Paris agreement provides the course to follow. 

However, meeting our climate commitments will require large scale investment. For Europe alone, we need an estimated €180 billion of additional investments every year until 2030. Public money alone will not be enough, so we need to mobilise private capital in favour of our planet. 

This is why we proposed two months ago our strategy for sustainable finance. And today we are tabling the first four legislative proposals to put this strategy into law. 

First and foremost, we want to establish an EU-wide classification-system for sustainable activities, to provide common definitions for what is green and what is not.

This is a ground breaking step. For the first time, we will assess sector by sector which economic activities are good for the climate and the environment. And we will lay the foundations for a Single Market for sustainable investment.

Currently, investors who want their money to contribute to the Paris climate goals face fragmented and confusing rules across the EU. This also leaves the door open for greenwashing – in other words when a product is sold as green without meeting basic requirements for sustainability.

That is why we propose to mandate a group of experts to draw up guidelines to assess the sustainability of economic activities, based on scientific evidence. They would then be turned into a binding classification, with specific criteria for each economic sector and sub sector. For example, within the building sector, a housing project could be qualified as green based on its energy efficiency, or based on the share of recycled building material.

We will start with the most urgent steps, namely climate mitigation and climate adaptation. In other words, those activities that help to stabilise emissions at the 2 degrees target, and those that would help us adapt to a changing climate. These classifications should be ready by the second half of next year, and enter into force six months later. After that, we will extend the classification to other environmental objectives, relating to the circular economy, pollution, water and marine resources, and ecosystems. Once the green classification system is complete, we could expand it to social and governance objectives.

The classification system would have several uses: it would act as a rulebook for national sustainable finance initiatives. It would serve as a guidebook for financial market participants to develop green financial products.

And last but not least, it would form the basis for future EU labels for green financial products. Today we already have green labels for organic food, energy efficient appliances such as fridges, or building materials. In the same way, we could have an EU Ecolabel for green bonds or investment funds, to give trust that an investment is actually green.

Our second proposal concerns those who manage investments on behalf of others, such as asset managers, insurance companies or pension funds. They already have a duty to act in the best interest of their clients. By considering sustainability, these managers can more fully assess long-term risks and opportunities, and not only short-term financial returns. That is why we will clarify that their duty towards their clients includes making sustainability risks a part of their decision-making process.

In addition, we want to increase transparency about how managers comply with this duty. Therefore, they should disclose how they take into account sustainability risks, and what impact these risks may have on returns.

For investment products that actively pursue sustainable objectives, the way these objectives are incorporated into investment decisions would also need to be disclosed.

There are two more proposal to complement this: 

First, we will propose a new category of benchmarks, comprising low-carbon and positive carbon impact benchmarks. This proposal also includes an obligation on benchmark providers to disclose information about their sustainable benchmarks. 

And second, we will update the suitability test for retail investors. This means that when potential investors have their first conversations with an investment professional, they will be asked about their sustainability preferences. This should make it easier for people to invest in green assets, and boost their inclusion in investment portfolios. Investing in green assets should be easy. 

Let me finally take this opportunity to thank the Commission services, and especially the FISMA team, for their hard work on today's proposals. They have worked tirelessly to deliver this package within short deadlines. 

I would also like to thank Vice-President Katainen for his support on this file. Vice-President, the floor is yours.

 

Vice-President Katainen

Thank you very much. Before I continue on today's legislative proposals, let me take a step back and look at how sustainable finance fits into the Commission's wider context. 

With the Paris Agreement, our work on the UN 2030 Agenda for Sustainable Development, and our circular economy action plan, including the plastics strategy, somebody must finance all this. We need €180 billion per year just to address the Paris commitments from now on. No public authority has this money. This is one of the reasons we wanted to concentrate on green financing. We need to look at how we could change the regulation in Europe in order to redirect financial markets towards the policy goals we have. 

Sustainable financing – all the changes and work around this - has been private sector driven, which is positive. Problem is that we don't have well-functioning, reliable regulatory environment which private sector can use. That's why there's a risk of green-washing, sometimes it's easier to use non-scientific methods to colour products green.

The European Fund for Strategic Investments has tried to address the market gap between the demand for sustainable financing and what the market can offer and it has functioned well. But we need to look at how to reform the entire private financing sector in order to achieve the policy goals. 

Our aim is to mainstream sustainability across the financial sector, and mobilise more private investment to sustainable investments such as renewable energy, energy efficient housing, or environment-friendly vehicles. Sustainable finance cannot be seen as a marginal phenomenon for some extremist group which don't understand the logic of a market economy. Instead we have to mainstream it. 

Consumers are expecting more. And private sector is ready to act if they had a level playing field. Today's proposals will increase transparency of sustainable finance and the investment opportunities it offers, so that investors have reliable information available to enable the transition to a low-carbon, resource-efficient and circular economy.

I would just say a few more words on two issues: the first is our third proposal on low carbon benchmarks. 

Benchmarks help to measure the performance of an investment product, and many investors rely on them for the creation of investment products and for asset allocation strategies. So they also have an important role to play in sustainable finance. 

With our proposal, we want to give investors who want to invest in low carbon strategies an appropriate tool to enable them to compare the performance of their investment. We will do this by establishing a new category of benchmarks, consisting of two specific types of benchmarks. We would then specify and establish minimum standards for the methodology of these benchmarks, in a Commission delegated act. 

The first type would be the low-carbon benchmark. This is based on decarbonising a standard benchmark, such as for example an equity index like the S&P500. The underlying stocks would be selected based on their reduced emissions, when compared to the stocks on a standard benchmark. 

The second type is a positive carbon impact benchmark. This is a more ambitious benchmark, which is aligned with the 2 degree objective in the Paris agreement. Here, the underlying stocks are selected on account of having carbon savings that exceed carbon emissions. 

In addition, providers of low carbon benchmarks will have to disclose how their methodology takes into account environmental, social and governance factors. Together, these actions will increase transparency towards investors on how these benchmarks select and weight their underlying assets and measure their carbon footprint.  

Our fourth proposal is to update the suitability test for retail investors, to include sustainability considerations into the advice that investment firms and insurance distributors offer to individual clients. Currently, firms do not always assess the non-financial preferences of their clients, such as those relating to the environmental and social impact of investments. 

Our proposal will clarify the existing obligation to act in the best interest of the client, and investment advisers and portfolio managers will have to offer investment products that meet client's investment objectives. This should make it easier for people to access sustainable and green investments, and boost the inclusion of these assets in investment portfolios. 

My final point is a bit different; it's related to the CMU's consumer angle, namely the motor insurance directive. It follows a thorough evaluation of the motor insurance Directive, and fulfils commitments made in the Commission's Consumer Financial Services Action Plan of March 2017. It has three objectives:

First, to better protect victims of motor vehicle accidents. It does this by putting in place a mechanism to ensure that victims are reimbursed even if the motor insurer is insolvent. In addition, it harmonises minimum amounts of motor insurance cover in all Member States.

The second objective is to improve the rights of motor insurance policyholders when they move to another Member State, by obliging motor insurers to treat their claims history in the same way as they would do with a national resident, with no discrimination. This will help mobile policyholders get the same insurance premiums as non-mobile ones.

And third, to help combat uninsured driving. Uninsured driving pushes up premiums for honest motorists who have a valid insurance. So our proposal allows Member States to conduct unobtrusive insurance checks on vehicles, for example using number plate recognition technology.

Thank you very much. We are ready to take your questions.

SPEECH/18/3925

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