Practices

Financing a sustainable European economy

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Final report 2018 by the High-Level Expert Group on Sustainable Finance. Secretariat provided by the European Commission.

The European Commission established the EU High-Level Group on Sustainable Finance (HLEG) to help develop an overarching and comprehensive EU roadmap on sustainable finance. It requested advice on how to ‘steer the flow of capital towards sustainable investments; identify steps that financial institutions and supervisors should take to protect the financial system from sustainability risks; and deploy these policies on a pan-European scale’.

For the Group, sustainable finance is about two imperatives. The first is to improve the contribution of finance to sustainable and inclusive growth as well as the mitigation of climate change. The second is to strengthen financial stability by incorporating environmental, social and governance (ESG) factors into investment decision-making. Both imperatives are pressing, given the rising climate-related risks and degradation in the environment and other sustainability areas.

 

Given the complexity of the financial system and its policy and regulatory framework, there is no single lever to achieve these ambitions and ‘switch’ the financial system to sustainability. Improving the contribution of the financial system to sustainable and inclusive growth requires a comprehensive review, the identification of areas where changes are needed, and the development of specific recommendations in these areas. That is what the HLEG has sought to deliver.

 

As priority actions, the HLEG recommends: establishing an EU sustainability taxonomy, starting with climate mitigation, to define areas where investments are needed most; clarifying investor duties to extend the time horizons of investment and bring greater focus on environmental, social and governance (ESG) factors into investment decisions; upgrading disclosures to make sustainability opportunities and risks transparent; enabling retail investors to invest in sustainable finance opportunities; developing official European sustainability standards for some financial assets, starting with green bonds; establishing ‘Sustainable Infrastructure Europe’ to deploy development capacity in EU member states for infrastructure necessary for a more sustainable  economy; and integrating sustainability firmly in the governance of financial institutions as well as in financial supervision.

 

The Group also advises EU to confront short-termism in financial markets so as to reduce its negative impact on long-term corporate investment and development; to consider ways to empower citizens to engage with sustainable finance; to monitor investment plans and delivery through a dedicated EU observatory on sustainable finance; to improve financial market benchmark transparency and guidance; to ensure that EU accounting rules do not unduly discourage long-term investment; to establish a ‘Think Sustainability First’ principle at the heart of EU policy-making; and to drive sustainable finance at the global level.

 

The HLEG also has recommendations for specific sectors of the financial system. Their purpose is: to promote real economy and sustainability lending in the banking sector; to enable insurance companies to have a stronger role in equity, long-term and infrastructure investments; to ensure that asset managers, pension funds and investment consultants grasp the sustainability preferences of their clients; to ensure that credit rating agencies lengthen the time horizon of  risk analysis and disclose how they consider ESG factors; to have listing authorities promote disclosure of ESG information; and to obtain better long-term research by investment banks.