The European Union has a long road to travel if it is to meet the stretching goals set out in the Paris Agreement on Climate Change – and legislative changes, many of them targeting the financial sector, are clearly going to feature heavily in its action plan. In that regard, an important step forward was taken last week, when the European Commission unveiled its latest proposals for asset managers, and these proposals will have important consequences for the private equity sector.

The EU has undertaken that, by 2030, it will reduce greenhouse gas emissions by at least 40% compared to 1990 levels, ensure that renewable energy sources contribute at least 27% of Europe’s energy consumption, and reduce energy consumption by 30%. Investors will be significantly affected by the steps that will be needed to tackle these challenges: they will create many lucrative investment opportunities, while threatening the value of many traditional businesses. At the same time, the Commission clearly sees financial intermediaries as an engine for change, and it is determined to make sure that they play their part.

Last week’s concrete proposals for European-wide rules follow publication of a report earlier this year by the High Level Expert Group appointed by the Commission, and an Action Plan published in March. Most significantly for private fund managers is a proposed requirement to publish (publicly, as well as to investors) information about how sustainability risks are taken into account; what impact they are expected to have; and how they are reflected in the firm’s remuneration structures. It is also suggested that the MiFID II rules should be amended to require portfolio managers and investment advisers to take clients’ ESG preferences into consideration when picking or recommending investments.

Alongside this, the Commission will require asset managers who market financial products as ecologically “sustainable” to disclose in advance and then to report on a consistent basis how those objectives are being achieved. It will also develop a taxonomy – or classification system – to determine whether an economic activity is environmentally sustainable. This taxonomy might, in the future, form the basis for labels for sustainable financial products, and these products are very likely to benefit from preferential regulatory rules. It would also mean that managers marketing in the EU under a “green” label would not have to navigate different national labelling rules.

In Europe, most people accept that material ESG (“environmental, social and governance”) factors should be taken into account by asset managers when making investment decisions. That is simply part of their fiduciary duty to maximise value for beneficiaries. The Commission is clearly determined to emphasise that fact. But it also wants to make clear that – at least as regards climate change and other environmental issues – future legislative and social change will ensure that such considerations are indeed material, and will have an impact on value. Failure to incorporate environmental factors into investment decision-making may not just be a breach of fiduciary duty, but will, in future, also constitute a breach of a regulatory duty. And it is anticipated that such a duty will apply to private equity and venture capital fund managers, as well as to many of their European pension fund and insurance company investors – so the impact will be both direct and indirect, and will extend to managers outside the EU hoping to attract European investors into their funds.

Many institutional investors are already demanding that their service-providers demonstrate an enlightened approach to responsible investment, and many private equity fund managers are delivering on that requirement. For them, these proposals will not represent a step-change. For others, there may still be some work to do.