Setting the stage for Europe’s next economic transformation?

On 31st January 2018 the High-Level Expert Group on Sustainable Finance (HLEG) published its roadmap for responsible finance in Europe. This 100-page detailed document we have read for you articulates an ambitious and comprehensive set of recommendations with an overarching objective to ‘hardwire’ sustainability into the EU’s regulatory and financial policy framework.

Following on from the recent guidelines issued by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and the recent release of the EU Commission’s Action Plan, this report signifies a burgeoning strategy for financial sustainability. It also hints at a pivotal moment for the global financial system, with Europe preparing to take the lead.

The report summary 

The report refers to what the HLEG sees as two imperatives: to improve the contribution of finance to sustainable and inclusive growth as well as climate change mitigation; and to strengthen financial stability by incorporating environment, social and governance (ESG) into investment decision-making. It addresses these two imperatives under four broad categories of recommendations:

Priority Recommendations: regarded as a crucial foundation to facilitate broader action.

Other Cross-Cutting Recommendations: which stretch across the financial landscape.

Sector-Specific Recommendations: which are tailored measures to specific areas of the financial sector.

Social and Broader Environmental Sustainability Recommendations: that reflect HLEG’s emphasis on looking beyond just climate change, taking account of other factors in long-term financial risk.

Europe’s next economic transformation?

The publication of the report signifies a growing drive among experts for financial reform. It even goes as far as to suggest adoption could lead to ‘Europe’s next economic transformation’. In light of the recent release of the TCFD recommendations, this appears to be a coordinated shift in focus and shared commitment towards sustainable climate finance.

The report urges the EU Commission to endorse the TCFD disclosure recommendations at the EU level calling for more regulatory momentum and suggesting that voluntary experimentation should be as short and as effective as possible, building on the experience of France’s Article 173 and consulting with stakeholders to facilitate swift uptake. It also recommends that the EU consider how to align the up and coming Non-Financial Reporting Directive (NFRD) with the TCFD guidelines.

The Commission’s response has been swift, publishing its Action Plan for Sustainable Growth on 8^th March 2018. It recognises that the financial system has a key role to play in mitigating the increasing threat of catastrophic and unpredictable consequences of climate change and sets out ten tangible actions which reflect the priorities and recommendations of HLEG and the TCFD.

HLEG says ‘Europe now has the unique opportunity to build the world’s most sustainable financial system’ but cautions that the implementation of measures should not add to the regulatory burden and will need to be fully integrated into European markets and policies in order to promote sustainable and long-term growth. Implementation of the Action Plan will need to take this into account if this vision of a sustainable financial system is to be realised within the sector.

Ultimately, however, this is the first important step by the Commission to move forward with the HLEG recommendations indicating that legislative and strategic momentum towards financial sustainability is now underway.

The recommendations 

Priority Recommendations

• Create a sustainability taxonomy, essentially a more technically robust classification system to provide the market with more clarity on what is ‘sustainable’
• Redefine green labels and standards as well as investor duties to facilitate and stimulate the growing market for sustainable financial investments.
• Broaden assessment of risks and opportunities to increase transparency and harbour long-term financial security by upgrading disclosure requirements.
• Improve governance and leadership, and establish sustainable infrastructure in Europe.

Other Cross-Cutting Recommendations

• Tackle short-termism inherent in the system to reduce negative impact of long-term investments.
• Empower citizens to engage them with sustainable finance and improve the monitoring of investment plans.
• Think ‘Sustainability First’ with the aim of instilling this mantra within the heart of EU policy-making.

Sector-Specific Recommendations

The report recognises that a roadmap needs to consider ‘the diversity of needs and capacities’ within the financial sector and the recommendations within this category are tailored to more specific identified needs. For example, to promote the real economy and sustainability lending in the banking sector.

Social and Broader Environmental Sustainability Recommendations

These include building a fairer Europe, protecting Natural Capital, and promoting more socially sustainable approaches to finance. The report outlines recommendations for supporting growth of social enterprise and increasing equality and inclusiveness across area and community.