The EU is picking up its game to embed sustainability in the financial sector. Even in a world where the news is dominated by trade embargoes, Brexit and elections, sustainable finance is a priority for all European institutions. Based on the European Union’s Action Plan for Sustainable Finance, changes for all financial players can be expected.
As PGGM we engage constructively in the process to create useful and usable standards that really help increase the sustainability of the financial sector. Based on our experience we see three important reasons for all financial institutions to follow the European developments and involve in the process.
Sustainable finance is here to stay
First of all, the need for embedding sustainability in the financial sector is acknowledged by all institutions alike. Even though they do not (yet) agree on “how” to do this. The topic is high on the agenda of the European Commission, Parliament and member states.
For many member states political and societal pressure for climate action is increasing. At the same time the European institutions are preparing for elections in March. Based on these preparations we expect sustainable finance to be prominent on agenda of the new Commission as well as Parliament.
Political momentum speeds up the political process
Secondly, the progress made in the decision making process of the legislative proposals put forward in May last year is exceptionally fast. The Commission has put forward three proposals two of which are expected to be finalized before May 2019. In comparison: it took about 10 years to finalize the IORPII proposals.
The two proposals expected to be finalized will result in increased disclosure requirements on the integration of Environmental, Social and Governance (ESG) factors in investment processes and minimum standards for low carbon and ESG benchmarks. The third proposal is a framework for classification of sustainable investments and is likely to take more time. But this will advance quickly once agreed as technical specifications are already being drafted.
Technical work is advancing quickly
In parallel to the negotiations of the legislative proposals, a Technical Expert Group composed of 35 experts in sustainable finance is working on the requirements for green benchmarks, European Green Bonds, climate related disclosures from companies and European definitions of green activities.
The expert group has already delivered on a report for climate related disclosures. The other reports are expected to be published in the coming four months. To speed up the work on the classification of green activities the expert group has recently been extended by specific sectorial experts. Currently there is an invitation for feedback from the market on the taxonomy. This is a great and important opportunity to share your input. Companies and financial institutions alike are asked to react on the preliminary technical specifications of green economy activities and the usability of the framework.
Input of stakeholders is vital
We expect sustainability in the financial sector to stay. The proposed policy and regulatory initiatives are likely to affect all players in the financial sector. Initially, the focus will be on enhanced transparency on the integration of sustainability factor and encouragement for investments in green activities.
In time we expect this to extend to increasing standards and – potentially - incentives for green investment. All the more reason to closely follow EU developments. Though the process is moving quickly there are ample possibilities to be involved and contribute to useful and usable standards for a sustainable financial sector.