By Paul Davies and Michael Green
The European Commission has recently published plans to integrate sustainability considerations into decisions made by investors within the EU. More specifically, the EU is looking to spell out in legislation, that the consideration of ESG issues should be incorporated into the fiduciary duties of EU asset managers.
The main proposal is to clarify that fiduciary duties of asset managers includes consideration of ESG issues, ensuring that sustainability is more central to corporate governance and promoting the effective incorporation of ESG performance in issuer credit ratings and key market benchmarks. The European Commission also renewed its commitment to the integration of sustainability and ESG factors in (i) rating methodologies and verification systems (e.g. green bonds), (ii) investment mandates of institutional investors and asset managers and (iii) upcoming reviews of financial legislation.
However, the European Commission will not formalise proposals to enact the suggested changes until 2018, when it is expected to implement a broader EU strategy on sustainable finance. Campaigners from WWF have praised this renewed focus on ESG issues, encouraging the European Commission to follow this up with an ambitious strategy the following year so that a clearer definition of ESG criteria can be set out. They argued that sustainability could be integrated “right away” to EU laws such as the law on alternative investment fund managers.
This follows the European Commission’s announcement in December 2016 that it would appoint members of a High Level Expert Group on sustainable finance. It comprises of 20 policy leaders from civil society, the finance sector and academia and started meeting in January 2017. The group are providing advice on how the EU should design relevant and proportionate policies and incentives for financial institutions. The group are meeting throughout 2017, with an interim report expected on 10 July 2017 (setting out the main issues and approaches that could be put in place) and a final report due in December 2017. It is expected that the group will provide recommendations for a comprehensive EU strategy on sustainable finance as part of the wider aim of creating an EU capital markets union by 2019. The European Commission would then use these recommendations as a basis to ascertain how to incorporate sustainability factors into the EU’s regulation of the financial sector. This is a significant step in implementing the EU’s agenda for sustainable development as well as the Paris Agreement on climate change, although it will require a “deep re-engineering” of the EU’s financial sector.
Although it is evident that ESG issues are being prioritised by the European Commission, it remains to be seen to what extent there will be greater clarity and transparency in relation to ESG issues in the EU financial sector. The interim report of 10 July 2017 will be an important early indicator of the possible future approach to ESG issues.
This post was prepared with the assistance of Ei Nge Htut in the London office of Latham & Watkins.