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 has been in force since 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

Explanation of principal adverse impacts of investment decisions on sustainability factors

As a member of the cooperative financial network, we have always been committed to responsible business practices in keeping with our cooperative principles. This approach applies both at company level and within fund management, our core business. Sustainability is therefore 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 sustainability factors at the heart of our investment decisions.

1. Principal sustainability factors and adverse impacts

When purchasing and analysing fund assets, the principle adverse impacts (PAI) on sustainability factors are taken into account. Criteria that can be used under the Sustainable Finance Disclosure Regulation to determine the principal adverse impacts on sustainability factors arising from investments in companies relate primarily to the categories of greenhouse gas emissions, biodiversity, water, waste, social matters and employment. For the purposes of investments in countries, criteria are grouped into environmental and social factors.

Union Investment takes account of the principal adverse impacts of investment decisions, paying particular attention to environmental, climate-related, social and employee matters, respect for human rights and the fight against corruption. Investment decisions can have an adverse impact on these factors, for example, if the investment target engages in controversial business practices or pursues 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.

Investing in companies that are involved in practices and business lines of this nature 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 humankind. 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 (e.g. under the Paris climate agreement).

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

The assessment of investments regarding their adverse impacts on the aforementioned sustainability factors 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, irrespective of whether or not a fund pursues an explicitly sustainability-oriented investment strategy. The term ‘ESG integration’ describes the systematic consideration of sustainability factors at the key stages of the research and investment process. As part of this process, sustainability analysts and portfolio managers also assess the principal adverse impacts of planned and executed investments on sustainability factors and document the findings. Union Investment’s portfolio managers can then access this documentation and review the adverse sustainability impacts (e.g. greenhouse gas emissions, below-par sustainability ratings, extent of implication in controversial business practices and business lines) of issuers and entire portfolios, evaluate them, and take them into account in their investment decisions.

For funds with a sustainability-oriented investment strategy that is geared towards reducing the principal adverse impacts on sustainability factors, further tools are added to the sustainability analysis. As part of a systematic assessment, each issuer is analysed on the basis of sustainability criteria relating to environmental, social and corporate governance matters. This analysis also takes account of sustainability ratings and ESG key figures from external providers (e.g. contributions to the achievement of the UN sustainable development goals, proportion of revenue attributable to fossil fuels) in order to obtain a comprehensive overview of the issuer’s sustainability profile. These criteria and our sustainability-oriented fundamental analysis are used to assign issuers an ESG score. This facilitates a comparison of the sustainability assessments of different issuers and thus promotes informed 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 smaller carbon footprint.

3. Measures to mitigate principal adverse impacts on sustainability

Union Investment applies certain core measures for all funds, irrespective of their investment strategy, in order to minimise or completely avoid the principal adverse impacts of investment decisions on sustainability factors.

1. 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.

2. Company-wide application of exclusion criteria

Companies that are involved in controversial business practices and/or business lines are excluded from the eligible universe for direct investments. As described above, 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 attributable to coal mining or more than 25 per cent of revenue is attributable to coal-fired power generation and if no credible strategy for achieving climate neutrality has been adopted).

3. Engagement

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 adverse impacts on sustainability factors.

4. Different investment strategies

A range of investment strategies have been defined that are tailored to different sustainability requirements.

The following additional criteria apply to funds with an investment strategy that takes account of environmental and social criteria but does not aim to avoid the principal adverse impacts on sustainability factors across all categories in investment decisions:

4.1. Fund-specific exclusion criteria for an investment strategy that takes account of environmental and social criteria

Companies that are involved in controversial business practices and/or business lines and thus violate the principles of the UN Global Compact (UNGC) are excluded from the eligible universe for direct investments by funds with an investment strategy that takes account of environmental and social criteria. In this context, stricter limits for activities involving controversial business practices are defined in addition to the exclusions that apply across the company. With regard to the assessment of government issuers, countries are excluded if they violate social standards. This applies, for example, to countries with a high level of corruption and illiberal countries with a low score on the index compiled by the international non-governmental organisation Freedom House. In this way, selected PAI categories are covered by exclusion criteria.

Further important tools that complement the aforementioned measures are used for funds with a sustainability-oriented investment strategy that is geared towards reducing the principal adverse impacts of investment decisions.

4.2. Fund-specific exclusion criteria for sustainability-oriented investment strategies

For funds with a sustainability-oriented investment strategy, supplementary exclusions apply for direct investments in companies that are involved in further controversial business practices and/or business lines, in addition to the exclusion criteria described in section 4.1. Companies are excluded, for example, if more than 5 per cent of their total revenue is attributable to fracking or oil extraction from tar sands. When analysing state issuers, the principal adverse impacts on sustainability factors are taken into account by excluding not only countries that breach social standards but also those that have a comparatively high greenhouse gas footprint. This ensures that all PAI categories are covered by exclusion criteria.

5. Consideration of the sustainability score

In addition, some sustainability-oriented funds also take the sustainability score into account in their investment decisions. As previously described, the sustainability score provides a comprehensive overview of an issuer’s sustainability assessment and reflects various adverse impacts on sustainability factors. This makes it easier to compare issuers and promotes informed investment and asset management decisions.

4. Engagement policy summary

Union Investment sees itself as 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 the principal adverse impacts on sustainability factors, 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 adverse 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.

We expect companies to be managed responsibly and in such a way that social, ethical and environmentally relevant factors are taken into account in addition to purely financial targets. We will support targets based on those factors, provided they are in the long-term interests of shareholders and creditors and thus enhance long-term enterprise value. We call on companies to comply with standards of good corporate governance, e.g. with regard to shareholder and creditor rights, the composition and remuneration of management boards and supervisory boards, corporate actions, independent auditors and transparency.

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.

5. 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 determining 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 rules 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 entitled ‘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. We believe that our financial, social and fiduciary responsibilities require us to not only reduce our own emissions but also ensure that the assets we manage are aligned with the achievement of these climate targets. Against this backdrop, a separate climate strategy was adopted for portfolio management with the aim of progressively reducing the amount of indirectly financed emissions and making the securities portfolio climate-neutral before 2050. This objective ties in with the target of limiting global warming to no more than 1.5°C compared with pre-industrial levels. In 2020, Union Investment became the first German asset manager to decide to phase out coal from its portfolio. Union Investment will terminate all investments in coal mining companies by 2025. Investments in companies that generate power from coal will also be phased out over the medium term.

6. Consideration of the principal adverse impacts of investment decisions on sustainability factors 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 advisors at Union Investment Institutional GmbH can access the documentation compiled by the sustainability analysts, review the adverse sustainability impact (e.g. greenhouse gas emissions, 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.

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.

Disclosure Regulation

A core objective of the EU action plan is to promote the transparency of sustainability information. In the so-called Disclosure Regulation, new transparency obligations regarding sustainable investments and ESG risks are regulated. The Disclosure Regulation has been in force since 10 March 2021.


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