Sustainable finance: Threat or opportunity?
The European Commission has presented its action plan for sustainable finance – to mixed reviews from market participants
It’s hard to argue with the goals, and no-one really has. The European Commission’s sustainable finance action plan is “for the benefit of the planet and our society”.
The Commission has explained the need for a sustainable finance strategy in environmental terms, citing climate change targets under the Paris Agreement. It has, however, also referenced the broader UN agenda for sustainable development – the source of the Sustainable Development Goals.
The plan document itself sets out 10 actions, spanning across the financial system. Institutional investors and trade associations have zeroed in on two – the creation of a system for defining what is sustainable – the EU ‘sustainability taxonomy’ – and aim to clarify investor duties on sustainability.
On the latter, the Commission has said that it will table a legislative proposal by May, subject to an impact assessment. This, according to the Commission, will aim to:
• Explicitly require institutional investors and asset managers to integrate sustainability considerations in the investment decision-making process; and
• Increase transparency towards end investors on how they integrate such sustainability factors in their investment decisions, in particular as concerns their exposure to sustainability risks.
Some stakeholders have welcomed the action plan while others have been lukewarm, arguably perhaps even cool.
ShareAction approved of the Commission’s “decisiveness” in regard to investors’ duties. It did, however, register concerns with the decision that work on the taxonomy should begin with climate change mitigation. This created an illusion that human rights were disconnected from environmental goals and was evidence of “siloed thinking”, it said.
At the Principles for Responsible Investment (PRI), director of policy and research Nathan Fabian encourages all PRI signatories to see the action plan as “an opportunity to improve the functioning and performance of the financial system in the sustainable service of its beneficiaries and savers”.
The PRI, which was an observer on the High Level Expert Group (HLEG) that advised the Commission, sees sustainability as “a financial system imperative”.
Asset managers are worried, however.
A spokeswoman at ICI Global, the US mutual fund body, says: “We are very concerned the plan’s direction on asset managers’ duties could reduce investment choices for savers and make it more difficult for fund managers to act in the best interest of their investors.” The group will be lobbying to “chart a different course”.
In Brussels, the European Fund and Asset Management Association (EFAMA) disagrees with the assertion that asset managers do not systematically consider sustainability in their investment processes.
Another Brussels-based investor representative association, this time for private equity, also notes that many fund managers were already focused on ESG. Any legislation on investor duties “needs to leave sufficient flexibility on how to implement sustainable finance procedures in practice” and reflect the industry’s breadth and variety, says Invest Europe.
Andrew Howard, head of sustainable research at Schroders, cautions against moves to prescribe disclosure and limit asset managers’ flexibility to innovate. He says: “The field has not yet reached the maturity needed to define the characteristics of sustainable investment practices or products. Attempting to do so risks shutting off the innovation and deeper understanding that many investors, ourselves included, strive to develop.
“The investment industry has made a lot of progress in integrating ESG factors into decision making, which would be undermined by building boundaries around sustainable investments.”
Howard also worries that the Commission’s actions could be counterproductive. “There needs to be a realisation that there’s a real danger of unintended consequences if EU policymakers are going to ask or look to capital markets to invest in certain areas by changing their investment process rather than by thinking about the broader industrial and economic policies and economic incentives,” he says.
If investors are being asked to consider issues they have not judged material but are deemed relevant to a broader environmental or social agenda for the region then “we would need an awful lot more clarity on precisely what that means and what the expectations are”, Howard concludes.
But there are also benefits in the action plan. PensionsEurope says it contains many recommendations that will improve sustainable investments and expand the information available to institutional investors on environmental, social and governance aspects of investments.
PensionsEurope explicitly calls for flexibility. The proposals “should remain sufficiently flexible not to upset the role of trustees or social partners”, says the association. “Pension funds’ main purpose will continue to be serving the best interests of their members and to delivering adequate pensions at low costs.”