Europe's Action Plan for sustainable finance

investment viewpoints

Europe's Action Plan for sustainable finance

In conversation with Maarten Vleeschhouwer 

Maarten is a Policy Officer at the European Commission (EC), and is focused on implementing the EC action plan on sustainable finance. In this Q&A, Maarten gives an update on the action plan, and explains how the EU is working to incentivise and channel private sector investment into green and sustainable development.

 

In March 2018, the European Commission released an action plan for financing sustainable growth. How is this progressing?

This week marks another milestone in our journey towards making the financial sector more sustainable. First, the Commission adopted the non-binding guidelines accompanying the Non-Financial Reporting Directive (NFRD) on reporting climate-related information. This was based on the earlier work of the Technical Expert Group (TEG) on Sustainable Finance. These guidelines, which, among other things incorporate the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, will provide companies with practical recommendations on how to better report the impact that their activities are having on the climate, as well as the impact of climate change on their business.

In addition, the TEG published new reports on Taxonomy, an EU Green Bond Standard, and Climate Benchmarks. Together, these three reports mark an important next step in the development of a much needed common language, tools and instruments for the financial sector to go greener.

The European Parliament (EP) and the Council reached a political agreement on the three legislative proposals that we announced in May 2018, on both climate benchmarks and sustainability-related disclosures for the financial services sector. There are minor linguistic modifications still to be made. The final text will be published in the Official Journal after the summer, and will go into effect then. On the Taxonomy, we urge the Member-States to come to an agreement as soon as possible, so we can enter into trilogues.

 

Can you say a bit more about the benchmarks proposal?

In terms of climate benchmarks, there are now two new categories of benchmarks for which we want to harmonize minimum methodological requirements. We have the climate transition benchmark, which basically requires the benchmarks to be on a path to transitioning. The second is the Paris-aligned benchmark. It is similar to the first, but requires full alignment with the Paris agreement. It is also important to note that we will improve the sustainability-related disclosures for all benchmarks.

Our aim is not to prescribe in full detail how these objectives are reached, but to establish the minimum requirements. While there are many climate or low-carbon benchmarks offered by index providers, they are not very popular because there is insufficient transparency on the methodologies, leading to a lack of understanding and trust. There also isn’t sufficient transparency towards environmental, social and governance (ESG) considerations when it comes to regular benchmarks.

All benchmarks, except for interest rates and currency benchmarks, will be required to disclose how they integrate ESG factors and their alignment with the targets of the Paris Agreement. I think this represents a game changer.

 

Does the availability of relevant data present a challenge?

I think the availability of data is a challenge in a lot of the work that we do, including when it comes to benchmarks. This challenge is one of the reasons we've asked the expert group to look into how we can improve climate-related information sourced from corporates, and how we could integrate the recommendations of the TCFD into Europe’s reporting framework. The guidelines that the Commission published last week, which are based on the TEG’s work, will help companies to disclose the impact of climate change on their business as well as the impact of their activities on climate. This will therefore enable investors make more informed investment decisions.

The Commission is also about to launch a study on ESG data, ratings and research in order to gain an overview of the market participants, the products and services they offer, and the opinions of users (investors and asset managers) on the quality of these ESG products and services. I think that this study will be particularly insightful.

 

How important do you think it is to establish a common language around what it is that we mean by sustainable investment?

This is crucial. This is a subject that came up a lot during my time at the Dutch Central Bank, in my discussions with a lot of financial institutions. There is a lot of demand in the investor community to invest more sustainably, but it’s not as if every asset owner, or every asset manager, will have environmental scientists in-house. It was also the number one recommendation of the High-Level Expert Group on Sustainable Finance.

 

How important do you think it is that asset owners start to look at sustainability across the whole portfolio, including the passive space?

It's a key development. I think it will also prove a more or less natural development based on the fact that sustainability is getting so much public attention and has really been going mainstream in recent years. It’s naturally going to affect more asset classes and industries. For asset owners, it is probably wise to take a broader perspective, although in some areas it might be easier than others. Government bonds, for example, may be less straightforward on this front, but we fortunately see a lot of developments in terms of green sovereign bonds.

 

What role can guarantees play in incentivising private sector investment?

We hear frequently that a lot of financial institutions are eager to incorporate sustainability into their investment decisions, but that the risk of some sustainable projects or companies are too high to be investable. In other words, there is a market failure here. This issue could be partially addressed through guarantees provided by the public sector. At the EU level, what we're trying to do for the next Commission is what we call the InvestEU Regulation. It integrates EU repayable investment support within a single fund. This support will be backed by the InvestEU guarantee of €38bn. Our aim is that at least 30% of the fund will be allocated to climate objectives. Moreover, implementing partners shall target at least 55% of the investment to contribute to meeting EU objectives on climate and environment. At the same time, our carbon price through the Emissions Trading Scheme also aims to make lower or zero-carbon investments more investable.

                                                       

What do you think investors and asset managers should expect next from the EU Action Plan?

First, we should all study and digest the Commission guidelines, as well as the three TEG reports. On both the taxonomy (which now proposes 67 activities as sustainable, from a climate change mitigation perspective) and on the interim report on benchmarks, the TEG will ask for feedback. On the TEG’s proposal for an EU Green Bond Standard, the Commission will now study this proposal carefully. Ultimately, it will be for the next Commission to take a decision on that. 

We also hope to have a political agreement on the taxonomy proposal by the end of this year. The updated delegated act for suitability test, which will require investment advisers to ask for ESG preferences, will arrive soon, which is aimed more at retail advisors.

Looking ahead, we have a few studies that we are conducting or will conduct. We are conducting a study on sustainability products and services, and we will assess whether that market needs any potential legislative intervention, or not. We will also assess whether credit rating agencies should be required to take ESG factors on board. And we are also doing studies on sustainable corporate governance, and on incorporating ESG factors in banks' risk frameworks.

 

about the author.

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Maarten Vleeschhouwer, Policy Officer at the European Commission

Maarten works on implementing the Action Plan on Sustainable Finance. Maarten works in particular on the Technical Expert Group on Sustainable Finance, which focuses on an EU taxonomy, an EU Green Bond Standard, low-carbon benchmarks and metrics for climate-related disclosures. Maarten is seconded to the Commission on behalf of De Nederlandsche Bank, the Dutch central bank and supervisor of banks, pension funds and insurance companies. Maarten worked on sustainable finance and climate risks at DNB before joining the Commission. Maarten is one of the authors of DNB’s report of climate-related risks in the Dutch financial, called ‘Waterproof?’. Maarten also served as special advisor on sustainable finance to DNB board member Frank Elderson.

Maarten holds an MA in International Relations and International Economics from the Johns Hopkins University School of Advanced International Studies.

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