Sustainability has a regulatory tailwind in Europe: Brussels is pressing ahead with EU action plan

The action plan presented by the European Commission pursues three core objectives. Firstly, it aims to redirect the flow of capital towards sustainable investments. Secondly, it promotes the integration of sustainability into risk management. This should limit financial risks arising from problems such as climate change, scarcity of resources and social issues. Thirdly, it seeks to promote greater transparency and long-term thinking in financial and economic activities. The plan devised to implement these objectives comprises a total of ten measures:

  1. Taxonomy – implementing an EU classification system for sustainable activities
  2. Green bond standard and ecolabel – defining norms and developing a label for environmentally responsible financial products
  3. Efficiency enhancement – promoting investment in sustainable projects
  4. Sustainability preference check – including sustainability in financial advice
  5. Sustainability benchmarks – creating transparency regarding methods and characteristics
  6. Ratings and market analysis – taking greater account of sustainability
  7. Sustainability of institutional investors/asset managers – adopting requirements concerning integration and transparency
  8. Risk management and capital requirements – embedding sustainability in regulatory requirements
  9. Transparency – strengthening disclosure requirements for sustainability-related information and financial reporting requirements in this area
  10. Corporate governance and short-termism – promoting sustainable corporate governance and measures to reduce short-term thinking in the capital markets


The EU’s ambitious action plan is fast approaching implementation. On the following pages, we will provide a brief overview of the most important measures and what investors can expect.

Eu action plan


Standards for the disclosure of environmental criteria by companies

The proposed harmonised criteria of the taxonomy are designed to help assess whether an economic activity is environmentally sustainable. The taxonomy is being developed in stages. Initially, the focus is on climate protection and adaptation to climate change. Further environmental aspects will be included later on. Expanding the taxonomy to include social aspects is currently being discussed. There is consensus that the taxonomy should also serve as a basis for the future implementation of norms and labels for sustainable financial products.

The taxonomy is a milestone in terms of defining more clearly which economic activities make a positive contribution to combating and adapting to climate change. It provides a much greater level of detail than other green taxonomies in the market, such as the ICMA Green Bond Principles or the detailed UN sustainable development goals (SDGs). This is also reflected in the length of the document (414 pages).

The taxonomy is not, and does not claim to be, a definition of sustainable investment. But it defines which economic activities have a positive impact on climate protection and adaptation to climate change. Commonly used ESG approaches, such as exclusion criteria screening, ESG integration and engagement, are not covered by the scope of the taxonomy on the whole and will remain popular ESG strategies.

In total, the taxonomy report identifies 67 activities relating to the environmental objective of climate change mitigation and nine activities relating to the environmental objective of climate change adaptation. The taxonomy works at a highly granular level of sector-specific activities that range from the composting of biodegradable waste to hydrogen production and passenger transport on inland waterways. Companies’ conformity with the taxonomy is measured by the revenue that they aim to generate from sustainable economic activities. A sustainable economic activity must make a substantial contribution to EU environmental objectives without adversely affecting other EU environmental objectives:

Sustainable economics

Here is an example from the taxonomy for an activity in the area of low carbon transport and infrastructure.


Construction, transport


Infrastructure for low carbon transport – land transport as an activity that facilitates low-emission transport and/or promotes the transition to a carbon-neutral economy

Screening criteria

  • Principle: The infrastructure must enable a substantial reduction in greenhouse gas emissions.
  • Metric:  Carbon emissions per passenger kilometre, per tonne-kilometre or per kilometre
  • Threshold: Areas in which the construction and operation of infrastructure is classified as positive include:
    • Infrastructure required for zero-emission transport (e.g. charging stations for electric vehicles and hydrogen filling stations)
    • Infrastructure for pedestrians and cyclists
    • Infrastructure for electric rail transport

DNSH Assessment

  • Climate change adaptation – consideration of factors such as physical consequences of climate change in infrastructure planning and design
  • Sustainable use and protection of water and marine resources – prevention of water pollution during construction and operation
  • Transition to a circular economy, waste prevention and recycling – use of recycled and recyclable materials in infrastructure construction and maintenance
  • Pollution prevention and control – minimisation of noise and vibration, reduction of dust, noise and environmental pollution during construction and maintenance
  • Protection of healthy ecosystems – measures to protect biodiversity (e.g. measures to minimise accidents involving wildlife, avoidance of work during breeding seasons)

So far, only a very limited pool of data on issuers is available for the purpose of assessing the conformity of a portfolio or global index with the taxonomy. Data is not yet available for many criteria of the taxonomy. This means that there is still much to be clarified regarding its use.

Disclosure Regulation

New transparency requirements regarding sustainable investments and ESG risks

Brussels is serious about tackling climate change: Regulation (EU) No. 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector – commonly referred to as the Disclosure Regulation – was published in the Official Journal on 9 December 2019 and is scheduled to come into effect on 10 March 2021.

“This Regulation lays down harmonised rules for financial market participants and financial advisers on transparency with regard to the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes and the provision of sustainability-related information with respect to financial products.” (Article 1 Disclosure Regulation)

The following are defined as financial market participants: insurance companies, investment firms, developers of pension products, alternative investment fund managers, credit institutions that perform portfolio management services and institutions for occupational retirement provision (IORPs).

The objective of this regulation is to harmonise sustainability-related rules at a European level.

It governs how persons and organisations defined as financial market participants or financial advisors have to publish information about the sustainability of their investment activities and relevant sustainability risks. And it also sets out in some detail what specific information needs to be published.

The following are examples of information that must be disclosed:

  • Financial market participants and financial advisors must state on their website whether and how they take account of sustainability risks in their investment decision-making processes and their remuneration policy.
  • In addition, financial market participants should identify, evaluate, manage and communicate the adverse effects of their investment decisions on ESG factors. In particular, they should define measures that can mitigate these effects (e.g. compliance with a pertinent corporate governance code).
  • A product prospectus should include detailed information on the assessment of sustainability risks and the likely implications these may have on the return generated by the financial product. In cases where sustainability risks do not apply to a financial product, the financial market participant and the financial advisor need to provide an appropriate explanation. These requirements will take effect on 30 December 2022.
  • When financial market participants advertise products based on their ESG criteria, they have to specify how these products or their underlying index meet these criteria and what sustainability objectives are being pursued with the product. The methods from the new taxonomy have to be used for these explanations.
  • Subsequently, retroactive assessments should be conducted to determine the extent to which these products did, in fact, contribute to the sustainability objectives to which they were assigned. The findings of these assessments should be published as part of the regular reporting cycle.

Sustainability risk

Sustainability risk refers to events or circumstances in the environmental, social and corporate governance spheres that could have a definite or potential adverse effect on the value of an investment if they occurred.

Sustainability risks are part of established risk categories such as market risk, liquidity risk, counterparty risk and operational risk and can have an impact on the materiality of these risks.

I. Investment advice

If Union Investment provides investment advice in respect of financial instruments, it will recommend financial instruments to the client that have already undergone Union Investment’s research process. The principle of ESG integration is embedded in this process. The term ‘ESG integration’ describes the systematic consideration of sustainability factors in the research process used to assess the issuer of the financial instrument. Sustainability factors include aspects such as environmental protection, social responsibility and treatment of employees, respect for human rights, and combating corruption and bribery. When selecting financial instruments to be offered to the client, the scores assigned to the financial instruments based on the research process are taken into account and presented to the client.

II. Consideration of sustainability risk in investment advice

Union Investment’s sustainability analysts examine material sustainability risks for a particular industry and/or asset class and thus incorporate financially relevant sustainability risks into the traditional fundamental analysis.

The findings from the ESG analysis and the sustainability risk assessment are documented. Union Investment’s investment advisers can access this documentation and use it as a basis for their investment advice.

III. Impact on returns

Taking account of sustainability factors can have a significant influence on the long-term performance of a financial instrument for which investment advice is provided. Issuers with inadequate sustainability standards may be more vulnerable to event risk, reputational risk, regulation risk, litigation risk, and technology risk. These sustainability-related risks can, for example, have implications for the company’s operations, its brand and/or enterprise value and even the continued viability of the business. If such risks materialise, they may have an adverse impact on the valuation of the financial instrument on which advice was provided.

Article 4 (5) b Disclosure Regulation – Opt-out clause for financial advisors

Consideration of adverse sustainability impacts*

As part of the cooperative financial network, we have always been under an obligation to act responsibly in accordance with cooperative principles. We apply these principles both at company level in our portfolio management activities and in the investment advice that our company provides. Sustainability is central to the way Union Investment interprets its role as an asset manager and investor. In order to live up to this self-image, we put the consideration of adverse impacts on aspects of sustainability at the heart of all of our investment decisions and our investment advice. Statements on our wider ambitions regarding corporate social responsibility and sustainability are published regularly in our CSR report.

1. Principal aspects of sustainability and adverse impacts

For Union Investment, the principal aspects of sustainability include environmental, climate-related, social and employee matters, and aspects relating to good corporate governance, respect for human rights and the fight against corruption. Adverse impacts on these aspects can result, for example, from decisions to invest in financial products that are used to fund controversial business practices or controversial lines of business. In this context, controversial business practices comprise, for instance, violations of the standards of the International Labour Organization (ILO), including those on child labour and forced labour, and serious infringements of human rights, environmental standards and anti-corruption standards. Controversial lines of business include, for example, the manufacture of outlawed and controversial weapons (ABC weapons, landmines, cluster bombs) as well as coal mining and coal-based power generation.

Contributing to the funding of these practices and business lines can cause a wide range of adverse sustainability impacts, as illustrated in the following examples. A violation of human rights should be regarded as a significant adverse impact on the peaceful and dignified coexistence of people on our planet. Exploitative working conditions clearly contradict the objectives of equality of opportunity, human dignity and mental and physical well-being. Violations of environmental standards may cause loss of biodiversity, the contamination of water, soil and air, or the destruction of natural resources. This can severely compromise the foundations of life for nature and mankind. High levels of greenhouse gas emissions, e.g. as a result of coal-fired power generation, clearly run counter to global efforts to mitigate climate change.

2. Strategy for the identification and weighting of adverse impacts on sustainability

The assessment of investments regarding their negative impact on the aforementioned aspects of sustainability is based on sustainability-related data obtained from external ESG data providers and internal analyses. Union Investment’s portfolio management applies the principle of ESG integration. This means that all material steps in the investment process systematically take account of aspects of sustainability. As part of this process, sustainability analysts and portfolio managers also analyse the principal adverse impacts of (planned) investments on aspects of sustainability and document the findings. Union Investment’s portfolio managers can then access this documentation and review the adverse sustainability impact (e.g. greenhouse gas emissions, water intensity, below-par sustainability ratings, extent of implication in controversial business practices and business lines) of issuers and entire portfolios, evaluate it, and take it into account in their investment decisions.

As part of the sustainability assessment of investments, the different sustainability criteria are typically weighted in accordance with their relevance to the investment in question. For example, greenhouse gas emissions are weighted more heavily for highly carbon-intensive sectors than for sectors with a small carbon footprint.

Whether it is possible to take account of the most significant adverse impacts on sustainability crucially depends on the availability of relevant information in the market. The necessary data is not available in sufficient quality and quantity for all of the assets in which the company invests through the funds and client portfolios that it manages. The company regularly reviews the availability and reliability of data and decides on this basis whether consideration of the most significant adverse impacts on sustainability can be extended to investment decisions on further assets.

3. Consideration of adverse impacts of investment decisions on aspects of sustainability in investment advice

Where Union Investment Institutional GmbH provides investment advice in respect of financial products, it will recommend financial products to the client that have already undergone the aforementioned research process.

The investment advisers at Union Investment Institutional GmbH can access the documentation compiled by the sustainability analysts, review the adverse sustainability impact (e.g. greenhouse gas emissions, water intensity, below-par sustainability ratings, extent of implication in controversial business practices and business lines) of a potential decision to invest in a financial product, and take this information into account in their investment advice.

4. Measures to mitigate adverse impacts of investment decisions on sustainability

Union Investment mainly relies on three core measures to minimise or completely avoid significant adverse impacts of investment decisions on aspects of sustainability.

ESG integration

The concept of ESG integration, as explained above, ensures that aspects of sustainability and – by extension – adverse sustainability impacts are taken into account in all investment decisions.

Company-wide application of exclusion criteria

Companies that engage in controversial business practices or operate in controversial lines of business are excluded from the eligible investment universe. This applies, for example, to companies that commit violations of ILO labour standards (including those pertaining to child labour and forced labour), serious human rights violations or serious breaches of environmental or anti-corruption standards. Exclusions also apply to companies that manufacture outlawed or controversial weapons (ABC weapons, landmines, cluster bombs) and companies that extract coal or generate power from coal (exclusion if more than 5 per cent of revenue is generated from coal mining or more than 25 per cent of revenue is generated from coal-fired power generation and if no credible strategy for achieving climate neutrality has been adopted).


For Union Investment, engagement means exercising voting rights at annual general meetings (UnionVote) and maintaining a constructive dialogue with companies (UnionVoice). The objective of engagement activities is to actively exert influence on issuers in order to prevent or reduce negative impacts on aspects of sustainability.

5. Engagement policy summary

Union Investment sees itself a s an active and responsible investor. We consider it our duty to represent the interests of our investors in our interactions with the companies in which we invest. This includes actively exerting our influence to avoid risks and promote sustainability. The escalation levels available to the portfolio management team offer the necessary granularity and can be combined in a variety of ways. They are adapted to individual engagement activities and investments on a case-by-case basis.

As a first step in the process of minimising or preventing negative impacts on aspects of sustainability, the portfolio managers generally seek to establish a constructive dialogue with the issuers of the assets in which we invest. The aim of this dialogue is to actively influence the issuers’ behaviour with a view to the prevention or reduction of negative sustainability impacts. This constructive dialogue with companies focuses on speaking at annual general meetings, talking to companies directly, and holding discussions on platforms provided by external institutions. In particular, this involves making clear demands of companies and setting appropriate deadlines for them. Further information on this subject can be found in our engagement policy and on our engagement website.

Through the exercise of our voting rights, Union Investment portfolio managers regularly influence the management and business policies of public limited companies at annual general meetings. They act in the interests of investors and exclusively for the benefit of the invested assets. For further information on our voting activities in general, please refer to our proxy voting policy.

6. Consideration of international standards and frameworks

In its capacity as a trustee, Union Investment is committed to giving top priority to the interests of investors. As well as implementing the applicable statutory and regulatory requirements, we take an approach to responsible investment that is guided by leading national and international standards that set the benchmark for decision-making, such as the United Nations Principles for Responsible Investment (UN PRI) and the UN Global Compact. These standards also serve as a basis for the determination of what we regard as the principal adverse impacts on sustainability. Our values and fundamental principles that form the framework for our engagement activities are based on the 2019 Code of Conduct of the German Investment Funds Association (BVI) and on the 2019 German Corporate Governance Code of the German Corporate Governance Code Government Commission. Union Investment also adheres to the principles of the 2018 Stewardship Code of the European Fund and Asset Management Association (EFAMA) and the Stewardship Guidelines of the Society of Investment Professionals in Germany (DVFA).

In December 2015, coinciding with the international climate summit in Paris, Union Investment adopted a climate strategy under the headline ‘2°C can be done’, which clearly expresses the company’s commitment to the implementation of, and support for, long-term political targets for the reduction of emissions. Work to develop a separate climate strategy for our portfolio management, aimed at progressively reducing the amount of financed emissions, is currently in progress.

  1. In accordance with Article 4 (5) of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability¬related disclosures in the financial services sector (‘Disclosure Regulation’).

Article 5 Disclosure Regulation

The remuneration policy is consistent with consideration of sustainability risk. Aspects such as the transparency and appropriateness of the remuneration systems, target-based and performance-oriented remuneration and long-term remuneration components form part of the remuneration policy.

Art. 8 Funds

This document lists all mutual funds of the Union Investment Group (excluding individual segregated funds or funds that cannot be purchased) that are classified as Article 8 products under EU Regulation 2019/2088.


Introduction of ‘low-carbon’ benchmarks

The objective is a harmonised and transparent approach.

The Low Carbon Benchmarks Regulation, which is based on the Financing Sustainable Growth action plan, sets out standardised EU-wide provisions for methods and disclosure requirements in relation to CO2-based benchmarks. The objective is to eliminate the fragmentation of the single market and ensure a high level of investor protection through EU-wide harmonisation.

Benchmarks play a central role in the world of investment. They can be used to create new investment products, define asset allocation strategies and measure performance. The main objective of the Low Carbon Benchmarks Regulation is to implement minimum standards for two different climate-related benchmarks in order to counteract greenwashing and improve transparency and comparability through disclosure requirements. In addition, it aims to implement ESG disclosure requirements for all benchmarks.

To this end, a new category of benchmark has been introduced that, in turn, comprises two types of benchmark: the EU climate transition benchmark and the EU Paris-aligned benchmark. The Low Carbon Benchmarks Regulation also requires information to be published on whether and how ESG factors are taken into account by the underlying method of a benchmark or family of benchmarks.

EU climate transition benchmark (CTB)

This low-carbon benchmark is based on the decarbonisation of a standard benchmark such as an equity index. The underlying shares are selected based on their emissions profile and compared with the shares contained in the standard benchmark. The objective is to use this comparison to compose a portfolio that meets certain minimum standards and is on a trajectory towards decarbonisation.

EU Paris-aligned benchmark (PAB)

This ‘positive carbon footprint’ benchmark ties in with the objective of the Paris agreement to limit global warming to less than two degrees above pre-industrial levels. The selection of the equities contained in the index focuses on companies that achieve carbon emission reductions in excess of their residual CO2 emissions (positive carbon footprint). The underlying idea is that the carbon emissions profile of the resulting portfolio is geared to achieving the goals of the Paris Climate Agreement. The portfolio has to be constructed in compliance with minimum standards and the economic activities of the companies represented in the portfolio must not have a significant negative impact on other environmental, social and corporate governance objectives.

‘low-carbon’ benchmarks