Sustainable Finance in the EU: How Will It Revolutionise the Financial Sector?
To reconnect finance flows toward sustainable investments and achieve the climate and energy goals agreed upon in Paris in December 2015, the European Commission (EC) launched an ambitious Action Plan on financing sustainable growth on 8 March 2018. In addition to the objectives that led to creation of the plan, the Commission also is seeking to reduce financial risks caused by climate change, natural disasters, and environmental and social issues, and encourage more transparent and long-term investments.
The first step of this plan was represented by a series of legislative proposals, which the EC put forward on 24 May 2018, on disclosure requirements relating to sustainable investments and the establishment of a taxonomy for environmental and social activities.
The EC’s Action Plan was one of the main discussion topics of the high-level conference, “The Future of Capital Markets in the EU: Towards Deeper Integration?,” organised by CFA Institute at the European Parliament in Brussels on 6 June 2018. Three key Members of the European Parliament (MEPs) gave their views on what is needed to facilitate the transition to a sustainable economy in the European Union.
Video: Capital Markets Union and European Supervisory Authorities’ reform: views from national supervisors and stakeholders.
Video: European Commission Action Plan on Sustainable Finance: views from key Members of the European Parliament and ESMA.
Pervenche Berès , MEP (Socialists & Democrats France) underlined that the EC has been doing an excellent job on sustainable finance, even though recent legislative proposals can be improved by the European Parliament. She said the best regulatory measure would be to set a minimum price for carbon emissions, but there would be huge resistance to it in Europe, and a carbon price floor will not be established at least in the short term. Berès said that the priorities now are a sustainable taxonomy, a straightforward disclosure and reporting framework, and carbon stress tests, which should also consider stranded assets. She opposes measures introducing green supporting factors, as these would entail the use of monetary policy tools, which she believes should only be used for price stability purposes, instead of budgetary policy tools.
Sirpa Pietikäinen, MEP (European People’s Party – Finland) emphasised that “the sustainable finance agenda should be the biggest change in the financial markets sector since the evolution of the accounting framework.” Despite the excellent work by the Commission and the High-Level Group on Sustainable Finance (which published a report including recommendations for the Commission Action Plan), some points need to be changed throughout the ongoing legislative process. Pietikäinen explained that green supporting factors could lead to misleading information for investors, as green investments are not always sustainable. Indicators need to be exclusively integrated in the corporate reporting framework, and fiduciary duty should be taken into account for investors and all other financial market actors.
Finally, these measures should be incorporated in some financial regulations, such as Markets in Financial Instruments Regulation and Directive (MiFIR/D), Prospectus Regulation, and the Packaged Retail and Insurance-based Investment Products (PRIIPs) Key Information Documents (KID)s, in order to reduce environmental risks stemming from climate change, scarce resources, and biodiversity.
Wolf Klinz, MEP (Alliance of Liberals and Democrats for Europe – Germany) would prefer a more cautious approach, since green investments do not necessarily mean stable investments and some of them could also be risky. However, the German MEP stressed that the Commission initiatives go in the right direction in trying to achieve more inclusive and sustainable growth in the EU, and the definition of uniform criteria for the environmental sustainability of economic and financial activities is well needed.
Steven Maijoor, Chairman of the European Securities Markets Authority (ESMA), also supports the Action Plan. He highlighted two main points of the Commission approach. First, investors ought to have as much information as possible to assess the sustainability risks related to their investments. Second, since the financial community is investing more and more sustainably and there is willingness to sacrifice short-term returns to reach long-term goals, there must be an adequate response from policymakers to cater to investor demand. Financial advisors should also take their clients’ sustainability preferences into account when they provide advice or offer a financial product to them (disclosure information on how and to what extent these criteria are used should also be required).
Although private industry has been asking for more actions on ESG (environmental, social and governance) investing for a long time, the public sector has not addressed this demand yet. The recent Commission initiatives could provide the right opportunity for policymakers to satisfy investor needs.
The quick launch by the European Commission of the Action Plan and its first proposals, and the willingness of the other two European co-legislators (European Parliament and Council of Ministers) to adopt these new measures as soon as possible, shows that ESG and sustainability are the main priority on the economic and financial agenda of the EU and that the wants to become a global leader in this field. However, it seems that the Commission approach is only focused on the “E” in ESG, as its primary objective is to follow up with concrete actions to the Paris agreement on climate change. The main fear is that the value for investors could be sacrificed to address climate change issues. Investor protection should absolutely remain high on the EU agenda.
CFA Institute is partnering with Principles for Responsible Investment (PRI) to hold a series of global workshops to explain how ESG factors impact share prices, bond yields, and spreads. Besides the workshops, this collaboration includes a major study and a survey on ESG investing, which will be published by the end of 2018. CFA Institute also launched a new survey, specifically tailored to the Commission proposals, focusing on the role of ESG in the investment decision chain and fiduciary duty, as well as the need for having a sustainable taxonomy and ESG benchmarks. The results of this survey will be released in late September.
If you liked this post, consider subscribing to Market Integrity Insights.
Photo Credit: ©Roberto Silvestri