By Paul Davies and Michael Green
The High Level Expert Group on sustainable finance (the Group), which the European Commission (the EC) established, published its interim report on 13 July 2017. The report sets out the key steps required to create a financial system that supports sustainable investment, as well as identifying areas for financial policy reform. The EC vice presidents welcomed these initial recommendations. In addition, the EC praised the recommendations’ “great potential” to enable the bloc to lead on green finance.
The Group acknowledged that the recommended investment requirements (including the €177 billion required annually to meet the 2030 climate and energy targets) might appear “overwhelming”. However, the Group emphasised that private capital is currently “available and willing” to back such recommendations.
The Group’s recommendations include:
- Developing a classification system for sustainable assets that embodies all acceptable definitions of “sustainable” and is not detrimental to any of the three pillars of sustainability (environmental, social, or economic)
- Introducing an official European green bonds standard for green asset classes, as well as labels for socially responsible investment (SRI) and sustainable funds. (The Group flagged that existing guidelines, such as the voluntary Green Bond Principles, could serve as a reference point.)
- Establishing a single set of principles in relation to fiduciary duty, loyalty, and prudence, noting that fiduciary duty encompasses sustainability
- Further strengthening environmental, social, and governmental (ESG) disclosures by firms and financial institutions that stock exchange rules and benchmarks can also reflect
- Conducting “sustainability tests” of all future EU financial legislation
- Creating “Sustainable Infrastructure Europe” — a dedicated match-making facility between private investors and public authorities seeking to build and finance infrastructure projects
- Enhancing the role of European supervisory agencies in assessing ESG-related risks
- Publishing of revised guidance by Eurostat on how accounting standards for energy efficiency investments should be interpreted to boost investments
The Group will also continue to explore other policy areas, such as (i) integrating sustainability considerations in ratings, (ii) improving transparency requirements for listed companies, and (iii) increasing levels of sustainable investment through a stable, long-term policy framework and a strong pipeline of sustainable projects.
The Group called on member states to adopt national plans for mobilising capital that would help achieve long-term environmental goals. In addition, the Group encouraged “green financial centres” such as London, Paris, and Stockholm to work together in order to discuss best practices and align standards.
On 18 July 2017, the EC held a public hearing on the interim report in Brussels that featured various high-level panel discussions, such as “Sustainable Finance: challenges and opportunities for Europe?” and “How do we re-engineer financial regulation to support sustainable finance?” Input from this event will likely feed into the public consultation process, thereby enabling the Group to shape its policy recommendations for the final report (due for release in December 2017). However, the EC has made assurances that it will start looking into these initial recommendations “as of now.”
This post was prepared with the assistance of Ei Nge Htut in the London office of Latham & Watkins.