I4CE welcomes the publication of the Final Report of the EU High Level Expert Group on Sustainable Finance
By: Benoît Leguet, Managing Director of I4CE
Following a year of meetings, consultations and discussions, the EU High-Level Group on Sustainable Finance (HLEG) released today its recommendations on the actions needed to make the EU financial system more sustainable. 2017 was a busy year in the sustainable finance community with the publication of the conclusions of the G20 Green Finance study group and the Taskforce on Climate-related Financial Disclosure (TCFD) – and concluded with the Paris One Planet Summit. The publication of this report demonstrates the will of policymakers and market actors to move from discussions to actions in 2018 and take concrete steps to help the financial system take into account climate change, as well as broader environmental and social considerations.
Ian Cochran, Hadrien Hainaut and Morgane Nicol supported this process through the provision of expertise to Pierre Ducret, President of I4CE , who participated in the HLEG as an observer for the Club of European Long-Term Investors.
The European Commission will build on these recommendations to deliver an action plan on sustainable finance in 2018
In December 2016, the European Commission established the EU High-Level Group on Sustainable Finance to draw on the knowledge and expertise of 20 experts and practitioners to develop an overarching and comprehensive EU roadmap on sustainable finance. The HLEG has in many instances focused on climate change as a pressing sustainability challenge that can provide examples for addressing the broader sustainability agenda. At the One Planet Summit in Paris, the European Commission has announced that it will build on the HLEG’s recommendations to deliver in March 2018 an action plan on sustainable finance, as part of the Capital Markets Union action plan. Three potential measures were highlighted the most by the European Commission: the integration of sustainable factors into fiduciary duties of investors; the creation of an EU taxonomy of green assets; and the introduction of a ‘green supporting factor’ into banks’ capital requirements.
The HLEG’s recommendations represent a step forward for the financial system to take climate issues into account
As highlighted by article 2.1.c. of the Paris Agreement, it is crucial that financial actors take into account climate issues and align their portfolios with a low-carbon and climate-resilient trajectory. On the one hand, financial actors have to contribute to the financing of the transition by redirecting financial flows from carbon-intense to low-carbon and climate-resilient assets. On the other hand, the stability of the financial system will be threatened by transition and climate risks, and financial actors have to decrease their exposure to these risks.
The recommendations published today provide key insights on actionable levers for both broad issues to be tackled. The report also presents an ambitious way forward to make the financial system sustainable in the long-term, beyond short-term operational recommendations.
I4CE considers the recommendations in the report as both important and feasible for implementation in the short-run. We hope to see the European Commission take them all into account while developing its action plan on sustainable finance. In particular, we would emphasize that while the section “Other Cross-Cutting Recommendations” may appear to be a second-string list, it nevertheless contains many important actions.
Highlight of some recommendations
This issue does not constitute a recommendation per se. Nevertheless, I4CE applauds the statement by HLEG of the need for a policy continuum between ‘real economy’ measures and measures on the financial system – and that action in the financial system cannot substitute measures in the real economy.
Recommendations on investor duties (III.2.), the supervisory mandate of the ESAs (III.8.), and the assessment of short-termism pressures (IV. 1.)
In order for the financial sector to increase its sustainability and be able to properly adapt to climate change issues, a clear governance of sustainable issues in the entire financial system will be key. Clarifying the inclusion of ESG factors into investors’ fiduciary duties, as well of the monitoring of sustainability in the supervisory mandate of ESAs, should be the backbones of this clarified governance and lead to an increased mainstreaming of sustainability issues into financial actors’ processes.
Recommendation on the creation of an EU observatory on sustainable finance (IV.3.)
The creation of an EU observatory on sustainable finance is much needed to identify the needed shift in financial flows based on EU energy transition objectives, monitor progress towards meeting sustainable capital formation needs, and support European and national policymakers in defining the most efficient policy measures to achieve the objective of a sustainable financial system.
I4CE welcomes this recommendation and will aim to contribute by providing its expertise on tracking domestic climate finance flows, as the team has been doing in France for 5 years.
Recommendations on an official European sustainability taxonomy, standards and labels, starting with green bonds (III.1. and III.5.)
These recommendations are aligned with analyses of the Green Bond market carried out for the past two years by I4CE. In particular, we welcome the call for setting accreditation criteria for providers of independent reviews and verification for green bonds, and a process of supervision for the accredited review providers. Defining an EU sustainability taxonomy will also help clarifying the various definitions of ‘green’ used in the market. This taxonomy should be based on state-of-the-art science, and I4CE recommends to include academic experts in the proposed Technical Working Committee.