This chapter discusses the integration of sustainability risks and factors into insurance regulation. According to the European Commission, sustainability considerations should be placed at the heart of the financial system. In its Action Plan, the European Commission announced its intention to clarify the integration of sustainability in so-called fiduciary duties in sectoral legislation. The objective of the European Commission is to direct financial and capital flows to green investment and to avoid stranded assets, which could be facilitated if sustainability is more clearly integrated in such duties of financial undertakings. This chapter describes the wide range and variety of developments in this area, which reflects some of the unique characteristics of the insurance sector, and which provides opportunities to contribute to the EC’s sustainability agenda. This contribution is not limited to the provision of considerable financial contributions to the sustainable investment agenda, which is closely related to the fiduciary duties of insurers and the application of the prudent person principle, but relate as well as to other elements of the sustainability agenda and resilience of the European economy, for which the insurance and reinsurance sector is well positioned to provide a meaningful support, for instance by addressing the protection gap.

The chapter assesses the extent of integration of sustainable finance into the MiFID II and the IDD investor protection frameworks. The chapter explains why retail investors do not always act upon their investment preferences and the role of the investment product distributor in remedying investors’ value-action gap. The chapter discusses the main changes to the MiFID II and IDD frameworks by analysing the new sustainability-related definitions, the amended product suitability assessment, the amended product governance process, and the amended conflicts of interest procedure. The analysis argues that full cross-sectional consistency will not be achieved in the EU investor protection framework as only the MiFID II and IDD frameworks have been amended while rules covering other product distributors remain the same. It also highlights the problems of inconsistency caused by sustainable finance amendments to existing legislation, including when it comes to applying the definition of sustainability preferences, which refer to concepts of the Taxonomy Regulation and the Sustainable Finance Disclosure Regulation, and the lack of a complete Taxonomy covering social and governance perspectives in the amended MiFID II and IDD obligations.

This chapter analyses the EU Sustainable Finance Disclosure Regulation (SFDR) by proposing that we should think about the SFDR as a layered system of sustainability-related disclosures, which combine the concepts of “single materiality” and “double materiality”. The authors offer a new perspective on popular proposals to turn the SFDR into a labelling scheme but argue that supervisors should avoid such avenues. The chapter emphasises that it is not the definition of “sustainable investment” which is relevant, but the additional disclosure requirements that apply as soon as a financial market participant deems its financial product to be in line with the definition. The SFDR encourages robust internal assessments over blind reliance on opaque ESG rating agencies and provides financial market participants with the freedom to justify what a contribution to an environmental or social objective means. This freedom sets it apart from a labeling mechanism with a clearly defined threshold of what a contribution should entail. The chapter also analyzes proposed guidelines by ESMA for regulating the names of investment funds that involve sustainable investment, and concludes that those guidelines do not create a clear labelling regime.