The interim report on sustainable finance by the High-Level Expert Group (HLEG), which was created by the European Commission in late 2016, is available online in English as of noon on 13 July. The outcome of intense weeks of work and impassioned debate by the expert group I'm a part of, the interim report provides an overview of what sustainable finance might become. It also establishes a framework for the recommendations that the expert group is tasked with preparing by the end of the year, which will aim to make sustainable finance the dominant practice of the European financial sector, contrasted with its relatively minor role today.
“Sustainable finance has two objectives," explains Christian Thimann, Chair of the High-Level Expert Group (HLEG). “The first is to accelerate the financing of a low-carbon, inclusive economy that is capable of responding to long-term needs, particularly in terms of infrastructure. The second is to preserve the stability of the financial system by evaluating the degree of risk posed by issues like climate change to the economy and finance, and more broadly by incorporating environmental, social and corporate governance (ESG) criteria in financial management.”
The 65-page report will now serve as the framework for consultations with the various stakeholders. Their agenda for the months to come is heavy, as banks, insurers, pension funds, financial centres, asset managers and other market players are observing the working group very closely. They all want to understand what vision of sustainable finance will emerge from its work and what recommendations may be issued at the end of the year.
For now, they’ll have to content themselves with some rough guidelines, which include better ESG reporting to investors, the creation of a European sustainable infrastructure network that is compatible with sustainable development goals and European Legislation.
The report also outlines around a dozen areas of influence where the group will direct its efforts in the coming months. These include “green” securities exchanges and financial centres, a sector in which Paris aspires to play a leading role through its Finance for Tomorrow initiative. But they also include the big stock indexes, which today are the cornerstone of the financial system, the definitive measure of financial performance. A monumental sum of assets is invested in financial products aligned precisely with the composition of these indexes.
Today's CAC 40 companies’ climate commitments are in line with a temperature rise of 5.4°C.
Their names are often familiar, like France's CAC 40. These indexes represent large companies whose stock is traded all around the world. They usually make the index due to their size and market value. As a result, the major stock indexes are a reflection of the real economy as it looks today, not how it ought to look if we want to stay within the 2°C limit established in the Paris Agreement.
To give an example, Hervé Guez, head of research and equities at Mirova, Natixis Group's sustainable finance unit, has calculated that today's CAC 40 companies’ climate commitments are in line with a temperature rise of 5.4°C. Developing sustainable finance will mean pushing companies and investors to undertake a massive shift toward low-carbon models. Today, few market players are prepared for the transition.
How quickly will Europe seek to transform its financial sector? The answer to this question will determine whether Europe is prepared to take on the leadership on the climate issue, a role also being coveted by China.
Anne-Catherine Husson Traore, @AC_HT_ , CEO of Novethic