"In the early morning after nearly 15 hours of debate, we finally found an agreement" said Paul Tang, Dutch MEP on 7 March after engaging in this battle to impose new reporting rules on financial market players. Eyes red with fatigue, Tang says he proud to have helped the parliament and the council take this decisive step to put sustainable finance on the agenda of all investors: management companies, pension funds, financial advisers, etc.
With that said, one must remain cautious. This agreement in principle legitimizes the obligation for financial professionals to explain to their clients the risks and opportunities related to the integration of Environmental, Social and Governance (ESG) dimensions in financial management. But everything remains to be concretely put in place. Currently, only France has this type of provision with the famous article 173, also adopted in the early morning of May 2015.
The aim of the proponents in this European battle over sustainable finance is to change the rules of the game. They wish to align financial markets and businesses with the environmental and social goals set by the European Union, and to comply with the 2-degree global warming trajectory outlined by the Paris Agreement. "Every year there is more than €180 billion for the transport, energy, water and waste sectors alone" says John Berrigan, Chief Financial Markets Officer for the Commission that drives sustainable finance strategy. He adds "Public money is not enough, we must mobilize private capital."
Overhaul of all models
This is why sustainable finance is disruptive. It serves to connect the colossal transformation needs of the current economy to become sustainable, with the same colossal means available to the financial markets. But this presupposes that such tactics redesign all models, whether they be investment decisions, measuring financial performance or the integration of environmental and social impact dimensions of an a given activity.
The European Parliament and the Council decided that this should begin with reporting requirements, much like France four years ago. They will make it possible to integrate the final customer in the process, which would make them theoretically on the demand side of investments which favour sustainable development. Valdis Dombrovskis, Vice President of the Commission in charge of Financial Stability and the Capital Markets Union explained, "the new rules on disclosures will enable investors and citizens to make more informed choices so that their money is used more responsibly and supports sustainability. The Paris Agreement is a massive investment opportunity. We need to seize it".
Reasons to hope
This provision on reporting is one of the three legislative proposals of the action plan on sustainable finance adopted by the European Commission in March 2018. The other two are the classification, which would create a common definition for all Europeans of what is sustainable or not, and the creation of appropriate financial performance measurement tools. In these three areas, the prospect of the next elections does not prevent us from trying to move forward. The technical expert group, which has been working since June 2018, has published several studies and has just presented a proposal for a European standard for green bonds.
With that in mind, one can have a reasonable amount of optimism. This reporting agreement shows that it is possible to overcome the opposition of all those who fear an unbearable additional constraint in the already complicated set of financial regulations. This political decision proves that a European majority can ask financial players to be accountable for the purpose of their investment strategy and to assess the negative impact that large ESG risks could have on the value of their assets. Things are moving along!
Anne-Catherine Husson-Traore, @AC_HT, CEO of Novethic