The European Commission’s Action Plan on Sustainable Finance, launched last week, was broadly welcomed by responsible investment groups and those representing the financial sector. The Commission’s intention is to develop a financial system that supports the EU’s climate and sustainable development agenda.
The publication of the action plan followed the work of the high-level group of experts on sustainable finance appointed a year ago. Inspired by the group’s final report, the Commission said it was proposing an EU strategy on sustainable finance setting out a roadmap for further work and upcoming actions covering all relevant actors in the financial system. The Commission said an urgent action was required and around €180 billion of additional investments a year were needed to achieve the EU’s 2030 targets agreed in Paris, including a 40% cut in greenhouse gas emissions.
These proposals included: establishing a common language for sustainable finance, or EU taxonomy to define what is sustainable and identify areas where sustainable investment can make the biggest impact; creating EU labels for green financial products on the basis of this EU classification system that would investors to easily identify investments that comply with green or low-carbon criteria and incorporating sustainability in prudential requirements as banks and insurance companies are an important source of external finance for the European economy.
The plan also proposed clarifying the duty of asset managers and institutional investors to take sustainability into account in the investment process and enhance disclosure requirements; requiring insurance and investment firms to advise clients on the basis of their preferences on sustainability and enhancing transparency in corporate reporting by proposing the guidelines on non-financial information be revised to further align them with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.
The European Fund and Asset Management Association (EFAMA) said it was supportive of the overall direction of the action plan, notably the commitment to strengthen sustainability disclosure, as well as the proposal on an EU taxonomy. The EFAMA said, “the absence of a common language for sustainable assets and the lack of consistent and comparable corporate disclosure on sustainability had long been challenges in the integration of sustainability in the investment decision-making process”.
The responsible investment pressure group, ShareAction applauded the Commission’s decisiveness in announcing its intention to legally clarify the duties of institutional investors and asset managers in relation to sustainability, as well as to ensure greater transparency towards end investors. ShareAction also welcomed the increasing focus on the social dimension of sustainable finance. Initiatives such as the intention to create a sustainable taxonomy, instead of a green taxonomy, showed that the Commission has been receptive to the feedback of stakeholders, including ShareAction, who have called for a rights-based approach to sustainable finance, the group said.
Nonetheless, ShareAction said it was concerned that the Commission’s approach of starting with “climate first” in its development of the taxonomy created an illusion that human rights considerations were somehow disconnected from climate risk mitigation and the achievement of wider environmental goals. This was the kind of siloed thinking that the Commission should be seeking to discourage if financial markets are to truly contribute to the creation of fair, resilient and inclusive societies, ShareAction said.
The members of the Global Green Finance Council (GGFC) supported the action plan and noted its breadth and ambition with 12 different workstreams promoting the transition to a sustainable economy. The GGFC said the action plan would help align further the existing initiatives and efforts of the financial industry with policy objectives. Among the measures it especially welcomed were the study of the potential merits of including sustainability factors in prudential requirements and a proposal to increase resources and to build sustainability expertise at the level of the European Supervisory Agencies.