To help develop sustainable finance, with an established reference framework, the European Commission created a high-level group of experts on sustainable finance on December 22nd, 2016. After a year of work, it delivered its recommendations on January 31st, 2017. These recommendations should serve as a basis for the Commission's action plan on sustainable finance.
Making sustainable finance an asset for competitiveness and credibility
The European Commission is due to announce an action plan on sustainable finance next March. Objective : "incentivise green finance across the entire investment chain and change the mind-set of those who manage our money", says Valdis Dombrovskis, vice-president for the Euro and Social Dialogue, Financial Stability and Financial Services at the European Commission.
The challenge is both political and economic in that, 10 years after the financial crisis, Europe would like to make sustainable finance an asset for competitiveness and credibility by showing its ability to put in place models that protect European citizens.
Today, however, the development of sustainable finance is very unequal in Europe. It is very present along the axis that extends from Scandinavia to France via the Netherlands. But it is proportionately underdeveloped in Germany and almost absent in eastern and southern Europe.
Key recommendations: transparency, standardisation and labelling
The report highlights the key role of finance in ensuring the transition to a more sustainable economy. It is operated under two guidelines: consideration for the long-term and for extra-financial dimensions (ESG) in the analysis and financial decisions. Three key recommendations have been made to better skew investments towards a more sustainable economy.
Transparency. The aim is to improve the quality, relevance and reliability of ESG data - particularly climate-related data - provided by economic actors. To this end, the report suggests that the Commission include the TCFD (Task Force on Climate Disclosure) guidelines, which refer to the global level of financial transparency related to climate risk disclosures. The experts also suggest taking measures in line with article 173 of the French energy transition law (see Novethic study). This is indeed a pioneering law that helps economic and financial actors better account for how they integrate climate risk into their strategy.
Example : the report recommends climate reporting for institutional investors, which are intended to become mandatory in Europe by 2020, and that they explicitly state the climate scenario, which is currently hidden in every index used by financial products (such as the CAC40 in France ).
Standardisation. The goal is to establish a clear classification of "sustainable" investments and those that are not. This list will serve as a reference for establishing new European standards, such as fund labels, green bonds or the "green supporting factor" within the banking industry (which has a lower prudential penalty). A taxonomy of this kind is already used for certain labels, such as the French TEEC label, which distinguishes energy transition funds, and is audited by Novethic. The first version will focus on activities that promote the fight against climate change and compliance with the 2-degree objective outlined in the Paris Agreement. Three sectors have been identified as priorities: energy, transport and agriculture.
Example : This classification will, for example, establish a European standard for green bonds according to the recommendation of the report.
Labelling. One of the objectives is to expand the offer of green financial products but also to make them more visible and more credible to European investors. For this reason, the group recommends the creation of a European eco-label as early as 2018. On Climate Finance Day, December 11th, 2017, Bruno Le Maire announced the same type of initiative by generalising an eco-labelled green product offering in life insurance contracts in France. Currently, thematic funds to finance the European transition are underdeveloped. According to a study by Novethic, there were 165 such funds in March 2017, representing 22 billion euros.
Example : the report recommends creating a requirement for financial actors to ask all individual customers seeking savings products, their preference regarding sustainable development.
Reporting scope : a roadmap aligning the economy on a 2 ° C trajectory
Even before the publication of the report, the Commission had already made recommendations concerning the responsibility of investors (e.g., the report proposes to integrate sustainability issues in the scope of legal liability for investors) and the scope of supervision for financial regulatory authorities. It involves integrating ESG dimensions (environment, social and governance) into the mandates. The goal is to make these criteria discriminating factors in the analysis of risk management policies and the various models used in financial management, as well as in the investment strategies proposed to clients.
When the report was published, the Commission praised the work done by the HLEG, which "far exceeded expectations". It remains to be seen how far the group’s recommendations will be integrated into its action plan on sustainable finance, which is scheduled to be unveiled in March.
In their own words : French members of the HLEG respond
The High-Level Expert Group is made up of 20 members from the financial sector, civil society and the academic world, in addition to observers from European and international institutions.
There are four French members: Anne-Catherine Husson-Traore, CEO of Novethic; Pascal Canfin, CEO of WWF France; Philippe Zaouati, CEO of Mirova and President of Finance for Tomorrow; and Stanislas Dupré, CEO of 2 ° Investing Initiative.
"The report recognises that, in order to be sustainable, the economic and financial ecosystem must change and better account for the long-term and for a wider range of dimension, particularly environmental and climatic dimensions. The Paris Agreement was established in 2015 with its entry into force in 2016; in 2017, the creation of the High-Level Expert Group on Sustainable Finance. In 2018, if the commission endorses our recommendations, it gives us hope that 2020 will be the "year of implementation", says Christian Thimann, chairman of the High-Level Group on Sustainable Finance (HLEG) and vice vhair for the AXA Group Task-force on Climate Financial Disclosures (TCFD).
"Our recommendations aspire to offer much more than just the development of green finance; we are trying to demonstrate the imperative need to build more sustainable models, not only for investors but also their shareholding companies in particular. To build them, it is necessary to have relevant, reliable and comparable information on the environmental and social risks to which they are exposed, bearing in mind the climate because this is also a question of economic risk. We believe this is a major competitive advantage for companies that will follow these recommendations", says Anne-Catherine Husson-Traore, CEO of Novethic and member of the HLEG.
"The report was developed in a truly inclusive way and is probably the most ambitious roadmap in the world striving to put the financial ecosystem and Europe in line with the Paris Agreement 2 ° trajectory. But more broadly, it aims to profoundly transform it, in a more sustainable way", explains Pascal Canfin, CEO of WWF France and member of the HLEG.