Greening the Capital Markets Union
This week’s European Commission Capital Markets Union Mid-Term Review includes a new “priority action” dedicated to sustainable investment:
The Commission will decide by Q1 2018 at the latest on the concrete follow-up that it will give to the recommendations of the High Level Expert Group on Sustainable Finance. In particular, it shall already set in motion work to prepare measures to improve disclosure and better integrate sustainability/ESG in rating methodologies and supervisory processes, as well as in the investment mandates of institutional investors and asset managers. It will also develop an approach for taking sustainability considerations into account in upcoming legislative reviews of financial legislation.
The statement shows the Commission is responding to pressure from non-industry voices in society. Some politicians are almost left speechless. It seems a very, very short window of opportunity has opened, and NGOs should act on it now.
I had the pleasure of contributing to a Call for action report presented to Commission Vice-President Valdis Dombrovskis by a group of NGOs on 6 June 2017, which demonstrates that so far the post-crisis financial reform work in the European Union has paid lip service to genuine mainstreaming of the non-financial impact of investments. As such, the Commission’s new priority action is an acknowledgement that more can be done, but NGOs must now ensure more will be done.
This is because there is no guarantee that any concrete (legislative) proposals come out of this particular priority Action in the Commission’s Review. “Taking sustainability considerations into account in upcoming legislative reviews” might not mean much more than integrating climate risk in the capital requirements framework. And on some issues, the Commission is waiting for the report of its High Level Expert Group on Sustainable Finance due in December 2017. It’s indeed time for a Call for action.
Moving the sustainable finance debate beyond climate change and beyond financial stability risk
While broad in its definition, the policy action seems to be very much climate-focused, frequently referring to the Paris COP21 agreement and decarbonisation. This is not really a surprise for two major reasons: climate change is one of the relatively short-term “risks” creating an existential threat to the financial system, and relatively mature in terms of measurement (compared to other non-financial metrics, which are often qualitative in nature).
Compared to other ESG-risks or indeed most of the UN SDGs, it is relatively easy to quantify “climate risk” in terms of potential (systemic) impact on individual financial institutions or the stability of the financial system as a whole. One large think tank is even named after the “2 degrees” global warming indicator.
The carbon bubble and its stranded assets, if unaccounted for, could lead to another systemic financial crisis – something definitely in the remit of the responsible Commission Directorate-General, DG FISMA. It is also a great investment opportunity for firms thinking with a long-term perspective and ready to provide the next generation investment society needs.
We see the same logic in the FSB’s Task Force on Climate-related Financial Disclosures. From a bank supervision perspective, climate change is (only) relevant because of the financial stability risk caused by climate risk. This logic completely ignores the externalised costs associated with climate change, which affects us all as citizens.
NGOs should therefore continue to call for a much broader view of sustainable finance, and for a broader set of non-financial impacts to be taken into account. The Commission does refer to existing frameworks such as ESG (Economic, Social and Governance impact) or the UN’s SDGs (Sustainable Development Goals). While neither of these are perfect, at least they are widely recognized as analytical frameworks and the market has started to respond to demand for products with a certain measurable impact on ESG or SDG criteria — so the Commission should be encouraged to retain a wide approach.
Time to let some fresh air in
While most NGOs have started working to set the agenda for the 2019-2024 European Commission, there is a short-term opportunity to put pressure on the Commission now and achieve some tangible wins during the remaining two years of this European administration, before the EP elections and Brexit take over in early 2019. This requires civil society advocacy, NOW.