Thursday 02/04/2020

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Europe aims to be in the vanguard of sustainable finance

Responsible Investment Strategist

The High-Level Expert Group on Sustainable Finance met on Wednesday, 19 July. It was established by the European Commission in late 2016 to help develop its strategy regarding sustainable finance, a priority in the capital markets union action plan.

During this public session, the committee presented its recommendations in a preliminary report. This is the result of its discussions and meetings with players in this domain, specifically insurance companies, banks, pension funds, asset managers and financial markets. The final report should be published by the end of this year.

Numerous points of criticism

The report has just been released, but there is already a lot of criticism. Basically, it refers to the fact that in essence this report is just a lot of good intentions and that it does not address the key issues relating to sustainable finance. Moreover, it does not propose any regulatory pressure on some of the major players in this ecosystem, for example the credit rating agencies and the stock exchanges. The report does not talk about actuaries, securities lending, short selling or hedge funds.

But most striking of all, the report fails to define what is sustainable finance in the first place. To some, this lack of a definition is a major obstacle to adopting effective policies which could get the financial sector back in touch with society and ensure that it is geared towards the long term.

An ambitious programme

It is true that the European sustainable development programme to 2030 is quite ambitious and will require sizeable investment (close to 180 billion euros annually). Hence, one must take a critical look at the real impact of the working group’s first recommendations.

First and foremost, given the lack of a single definition, the group recommends that sustainable assets be categorised, a major challenge for the sector but a move which would give investors greater visibility, more transparency and greater confidence in the products they are offered. However, the transition to a low-carbon energy system will require investments which are so substantial that retail investors are just one link in the chain.

Green bonds

Green investment will require private capital to be deployed. Green bonds are once again being hailed as a key instrument to finance the low-carbon economy, resulting in a more sustainable financial system. In this report, the experts suggest a European label and standard for green bonds in order to reduce the risk of controversies related to some issues, which was recently the case with Repsol. Specifically, this Spanish oil company issued a green bond whose genuine objective was questioned as it aimed to finance more production, resulting in higher carbon emission levels. Labelling would certainly create greater transparency, but it would also incur a cost for issuers on a market which could be quite lucrative to credit and labelling agencies.

French influence

Finally, ensuring that sustainable development becomes an intrinsic part of the fiduciary tasks of institutional investors, following the example of the French model and article 173 of the French law on energy transition, is the third main recommendation of the working group. It would require institutional investors to report on their risk management relating to climate issues and to include environmental, social and governance criteria in their investment policy.

It is true that the recommendations of the high-level working group are strongly inspired by the French approach. After all, its president, Mr Christian Thimann, who is Group Head of Regulation, Sustainability and Insurance Foresight at AXA Group, is the founder of the article 173 working groups. He has also been the vice president of the working group on financial publications relating to climate change for the Financial Stability Board. Among the 20 experts several French institutions are represented, notably Mirova, the sustainable asset manager of Natixis group, Novethic, the French rating agency for sustainable products, the insurance company Aviva and the NGO WWF France.

European leadership

In this way, France has taken up the issue of sustainable investment, a big priority for the commission of Jean-Claude Juncker, who aims to have the European Union take up the global leadership role. After all, following the United States’ withdrawal from the Paris Agreement there is a void to be filled. It will nevertheless remain to be seen whether the European Union will be able to push a strongly heterogeneous model mainly geared towards obligatory disclosure aimed at fostering greater transparency.