The High Level Expert Group (HLEG) on Sustainable Finance made its final recommendations to the European Commission (EC) in its landmark report Financing a Sustainable European Economy, published in January 2018.
The report contains 24 separate (but interlinked) recommendations that cover nearly every aspect of the financial system. Its vision is broad, identifying sustainable finance as a core strategy for the EU if it is to achieve its goals of prosperity and environmental regeneration.
All of the recommendations have a major potential impact on the success of sustainable finance but three in particular struck me as interesting.
If Europe is to successfully promote sustainable finance, it needs to have a common language. The report therefore calls for a sustainability ‘taxonomy’ (classification system), applicable for all types of assets and capital allocation. This common language will serve as the foundation for the sustainable finance initiative. The EC has said that it will put forward a legislative proposal on the governance of this classification system in the spring.
Data remains a huge barrier and so the HLEG recommends upgrading disclosure rules to make sustainability risks fully transparent, starting with climate change. This includes specific proposals for implementing the recommendations of the FSB’s Task Force on Climate-related Financial Disclosure (TCFD) – essentially an EU-climate disclosure regime that is compliant with the TCFD recommendations.
The report recommends clarification on the investor duties of asset owners, investment intermediaries and financial advisers, so that these can meet the needs of their clients. This is recognised as requiring the amendment of multiple EU directives that link investor duties to the investment horizon of an individual or institution (including but not limited to IORP II, MiFID II and Solvency II, as well as UCITS, AIFMD and the Shareholder Rights Directive)
The EC has as a next step published its Action Plan: Financing Sustainable Growth on 8 March, based on the HLEG recommendations. The EC intends to act very quickly. On the taxonomy, it confirmed that ‘the aim is to embed the future EU sustainability taxonomy in EU law” and will table a legislative proposal in Q2 2018. In terms of investor duties, the EC also intends to table a proposal in Q2 2018 to clarify institutional investors' and asset managers' duties in relation to sustainability.
So more to come and very shortly.
About the HLEG
Established in December 2016 with the goal of providing a sustainable finance roadmap containing practical policy recommendations, the HLEG delivered recommendations on:
- How to integrate sustainability considerations more effectively into the EU’s financial policy framework
- How to protect the stability of the financial system from risks related to the environment and its stability
- How to mobilise capital, notably from private resources, to finance sustainable investments and growth
The final report proposes:
- A classification system, or 'taxonomy', to provide market clarity on what is 'sustainable'
- Clarifying the duties of investors' when it comes to achieving a more sustainable financial system
- Improving disclosure by financial institutions and companies on how sustainability is factored into their decision-making
- An EU-wide label for green investment funds
- Making sustainability part of the mandates of the European Supervisory Authorities (ESAs)
- A European standard for green bonds
At BNP Paribas, we believe that banks can and should support the move to sustainability and the transition to a green economy. We therefore continue to develop the sustainable finance solutions that support our clients and society to make this transition.