Sustainability-related disclosure in the financial services sector

The European Union (EU) is committed to environmentally and socio-economically sustainable development. To this end, it has adopted an Action Plan for financing sustainable growth, recognising that the financial sector has a crucial role to play in channelling resources within the economic system in this direction.

On 9 December 2019, Regulation (EU) 2019/2088 of the European Parliament and of the Council on sustainability-related disclosure in the financial services sector (the SFDR) was published.

The SFDR requires financial market participants and financial advisers to provide clients with information on their policies for integrating sustainability risks into investment decision-making and investment and insurance advisory processes. Sustainability risk is defined as an environmental, social or governance (ESG) event or condition that, if it occurs, could cause an actual or potential material negative impact on the value of an investment. Investors will, therefore, have at their disposal a more comprehensive set of information, which will enable them to make more informed “sustainable investment” decisions.

On 22 June 2020, Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 (the Taxonomy Regulation) on environmentally sustainable economic activities was published in the Official Journal of the European Union, with the aim of introducing a harmonised definition and classification system for economic activities that can be considered sustainable.

The SDFR and the Taxonomy Regulation are the main regulations designed to implement the objectives of the Action Plan on financing sustainable growth. They also aim to:

encourage market participants to manage sustainability risks by identifying their financial implications;
identify sustainable economic activities underlying investment decisions and financial products;
promote transparency towards investors and enable them to make the most informed decisions possible.

Banca MPS has already undertaken many activities to integrate sustainability criteria and risks in the provision of advisory services, in governance activities and in areas related to the training of its staff. The new regulations came into force at different times.

As of 10 March 2021, the legislator has required certain implementations from intermediaries. These include:

the integration of sustainability risks into investment decisions and investment and insurance advice;
information on how a financial product addresses material adverse impacts on sustainability factors;
disclosure to customers.

In theory, all investment decisions can have adverse social and/or environmental impacts on stakeholders due to the economic activities of the investee company. The Bank therefore considers Principal Adverse Impacts (PAIs) on sustainability factors in both its investment advisory and portfolio management activities. PAIs are the so-called 'negative externalities' of economic activities, i.e., the effects of investment decisions and investment advice that have a negative impact on sustainability factors.

In order to analyse its product range, the Bank uses the information provided by the companies whose products and financial instruments it places, the information made available by external companies specialising in the analysis of products and financial instruments (info-providers), as well as any international certifications obtained by individual products or financial instruments. Consequently, the Bank aims to enrich its commercial offer by selecting financial products and instruments that genuinely meet sustainability criteria, avoiding the inclusion of financial products and instruments that claim to pursue sustainability goals, but which do not do so in substance (greenwashing).

On 1 August 2022, the MiFID 2 ESG measures came into force, which, in summary, provide for:

revision of the MiFID II questionnaire to examine customers’ sustainability choices in relation to investments and investment or insurance advice;
revision of the rules on sustainability suitability (ESG rating) in investment decisions and investment or insurance advice;

On 23/09/2022, ESMA published the final report which, by updating the 2018 Guidelines, introduces new aspects of the suitability requirements to implement the changes made to the MiFID II Delegated Regulation (2017/565) regarding the integration of the new sustainability factors, risks and preferences, both for the purposes of the suitability assessment and in the organisational requirements for intermediaries. As a result, intermediaries, such as Banca MPS, will have to carry out a more careful screening of proposed investments in relation to the preferences indicated by customers, so that they are integrated and verified in the suitability assessments. These changes will be implemented by the bank from 25 September 2023. From this date, customers will be required to inform the Bank of their preferences and the extent of these preferences in one or more of the following areas:

Financial instruments for which a minimum proportion is invested in environmentally sustainable investments, i.e., investments in economic activities that make a significant contribution to one or more environmental objectives, such as: climate change mitigation; climate change adaptation; the sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and reduction; the protection and restoration of biodiversity and ecosystems.
Environmentally sustainable financial instruments (as mentioned above) or investments with social objectives, such as investments that contribute to tackling inequality or that foster social cohesion, social integration and labour relations, or investments in human capital or in economically or socially disadvantaged communities (provided that the companies benefiting from such investments follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance).
Financial instruments that consider the principal adverse impacts (PAIs) on environmental, social and governance factors with a view to mitigating them. PAIs aim to capture the negative impacts that investments may have on the environment or society.

When providing investment advice and portfolio management services in relation to UCITS and IBIPs, the Bank integrates and manages sustainability risk together with the sustainability preferences expressed by customers, based on an analysis of the appropriate risk management measures (in compliance with Regulation (EU) 2019/2088 (the SFDR) and the related disclosures) adopted by the UCITS issuers themselves. In this way, it extends its offer to investment products with environmental or social characteristics or with sustainable investment as their objective (classified as products falling within the scope of Articles 8 or 9 of Regulation (EU) 2019/2088 (the SFDR)).

Currently, the Bank is continuing its ESG activities in order to collect specific information on the features that characterise products investing in "environmentally sustainable" or "taxonomy-aligned" activities (pursuant to Article 2(7a) of the new MiFID II Delegated Regulation), in sustainable activities as defined in Article 2(17) SFDR (pursuant to Article 2(7b) of the MiFID II Delegated Regulation) and products that take into account "Principal Adverse Impacts" or "PAIs" (pursuant to Article 2(7c) of the MiFID II Delegated Regulation.

ESG and the Principle Adverse Impacts (PAIs)

As part of the decision-making process for the provision of investment services, Banca MPS has defined a specific strategy aimed at integrating and monitoring sustainability risks and their potential impact on investment performance.

Specifically, within the framework of its portfolio management service, Banca MPS provides for the analysis of counterparties in terms of sustainability risk and compliance with regulatory standards, also taking into account the Principal Adverse Impacts (PAI) defined in the context of the regulatory technical standards relating to the SFDR, the frequency of their monitoring and the publication of the PAI integration policy on the websites.

The indicators provided by the info-providers and the resulting investment strategy are designed to exclude or limit investments in certain controversial sectors that are certain to have a negative impact on sustainability factors (e.g., companies producing unconventional weapons) and to promote investments that are positive in terms of environmentally and socially sustainable development.

In this sense, the ESG data provided by the info-providers also take into account possible negative impacts on sustainability factors and controversies resulting from the economic activities of the issuers and producers of the financial instruments in the managed portfolios. By monitoring the indicators provided by the information providers, it is possible to have a constantly updated assessment of the main negative impacts on sustainability factors in investment decisions.

In order to limit the negative impact of investment decisions on sustainability factors, Banca MPS has provided for the monitoring of the financial instruments in its portfolios with in-depth due diligence on issues that could potentially represent a significant risk to the issuer's long-term financial performance, such as issues of transparency and environmental, social and good governance principles.

Sustainability and the Bank’s remuneration policy

The Bank has set itself the goal of developing a remuneration policy that is not solely focused on profit and loss, cash flow and balance sheet results, but that reflects a fundamental awareness of values and principles that include the environment, the creation of sustainable value, gender neutrality, inclusiveness, equality, the promotion of equal opportunities as well as listening to, engaging and involving employees.

The processes adopted to implement the remuneration policy are based on clear and rigorous governance rules, with structured approaches and decision-making processes, as well as continuous comparison with the internal and external market for equivalent roles. Banca MPS is committed to spreading the awareness that a more inclusive company can bring benefits in terms of the quality of the services offered, the corporate climate and the well-being of employees, also through an ongoing dialogue aimed at improving the level of inclusiveness (for further details, see the Report on the remuneration policy and on compensation paid and the Non-Financial Statement).

To ensure that customers are properly and continuously informed, the Bank provides in this section a summary of the main sustainability-related regulatory changes that may have an impact on its customer advisory process.