The EU Commission is accelerating EU leadership in sustainable finance with measures aimed at aligning the financial system with sustainability goals.
Sustainable finance, also known as sustainable investing, factors environmental, social and governance (ESG) issues into investment decisions with the goal of generating both financial returns and positive social impact. The idea is not new, but it is gaining traction. The Global Sustainable Investment Alliance (GSIA) reported in its biennial Global Sustainable Investment Review that $23 trillion – 26% of all assets under management in 2016 – were in socially responsible investments. According to Swedish bank SEB, the issuance of green bonds, whose proceeds are invested in environmental projects, reached $163 billion in 2017 vs. less than $500 million in 2008.
On March 22 the European Commission held a high-level conference in Brussels focused on its strategy to “reform the financial system in support of the EU's climate and sustainable development agenda” and “how best to put the Commission's Action Plan on Sustainable Finance into practice”, according to a news release. The event was co-hosted by Commission President Jean-Claude Juncker and Vice-President Valdis Dombrovskis. Keynote speakers included French President Emmanuel Macron and former New York mayor Michael Bloomberg.
One of the goals of the conference was to look at how public policy might address the lack of common standards for sustainable finance. At present there is little consistency in certification and evaluation tools and methodologies. As The Economist explains, “One aim is to create a framework within which to classify the sorts of activities that qualify as sustainable investments, and against which to benchmark existing standards.” For example, the Commission proposes labelling green financial products to denote their compliance with green or low-carbon criteria.
The European Commission, with its advisory group, the High-Level Expert Group on Sustainable Finance (HLEG), is also proposing measures related to corporate reporting and transparency. Further, the plan addresses the responsibilities of asset management firms, institutional investors, insurance and investment firms regarding sustainability. The European Fund and Asset Management Association has expressed concern that proposed measures would “turn ESG investing into a box-ticking exercise”, The Economist reports. Christian Thimann, a senior executive of AXA Group and HLEG Chairman, counters that even ticking boxes would improve upon the current lack of requirements.
While some of its arguments have yet to be won, the Commission’s plans could give a boost to sustainable finance in Europe. And while doing so will not necessarily have an impact on the global financial system, it could provide a model for how financial rules can serve to support environmental sustainability and social responsibility.