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EU strategic fund urged to 'step up' talks with institutional investors

The strategic investment fund at the heart of the EU’s Investment Plan for Europe must “step up” its engagement with institutional investors to facilitate more sustainable infrastructure investment, a €13trn-plus coalition of pension funds and asset managers has said.

The Institutional Investors Group on Climate Change (IIGCC) addressed its call specifically to the investment committee of the European Fund for Strategic Investment (EFSI), the EU’s vehicle for implementing what was initially known as the Juncker Plan.

The IIGCC has previously made a series of recommendations to boost investment in renewable energy and other sustainable infrastructure in Europe through the EFSI.

In a report published yesterday, 20 September, it noted that some of these, such as “robust sustainability criteria” that rule out EU support for new high-carbon projects, have been taken up.

Looking ahead, it said that now the Investment Plan for Europe and the EFSI were in operation, “it is crucial that EFSI’s investment committee steps up its engagement with institutional investors”.

It said the European Investment Bank (EIB), EFSI’s main partner, was playing a “very positive role” in catalysing low-carbon investment and engaging the institutional community.

The IIGCC’s report, on aligning the EU financial system with a transition to low-carbon energy, comes after the European Commission (EC) last week announced that it would double the timespan and financial capacity of the EFSI, with “EFSI2.0” also focusing more on investments in projects contributing to limiting climate warming.

Sustainability ‘relegated’ in CMU

The thrust of the investor group’s report was a call for financial regulation to “enable and facilitate” the real economy shifting to low-carbon, with the IIGCC making wide-ranging recommendations including changes to Solvency II regulation, the EU Emissions Trading Scheme and the EU’s Capital Markets Union (CMU) plan.

On the latter, it said Commission proposals on sustainable investment so far “relegate sustainability considerations to niches within the CMU rather than making them a cornerstone”.

The Commission launched a consultation on long-term and sustainable investment in December 2015, and the IIGCC said it supported “the development of a sustainable CMU action plan” as part of the EC’s review of its CMU proposals.

Specifically, it recommended that the EU’s 2030 climate-energy targets be built into the CMU review.

The investor group also called for “appropriate” treatment of infrastructure as an asset class in insurance and banking regulations (Solvency II and the Capital Requirements Directive, respectively).

This, it said, “should be able to advance the ability of investors to manage their legacy exposure towards high-carbon assets and invest into low-carbon projects and infrastructure corporations”.

However, it said that, while revisions to Solvency II and the Capital Requirements Directive address infrastructure investment “opportunities”, including sustainable infrastructure assets, “it does not of itself improve the way that capital markets assess, price and transfer risks on the side of high-carbon incumbents”.

It therefore called for more transparency about the risks inherent in high-carbon assets, and for rating agencies to better integrate climate risk in ratings.

It acknowledged calls from EU policymakers for pension funds to conduct climate stress-tests and said that, although it supported this in principle, it would be premature to require “mandatory, full stress-testing of asset owners’ climate risk exposure”.

“However,” it added, “basic stress-testing should be encouraged to the extent currently possible.”

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