The asset owner voice is virtually missing from the European Commission’s public consultation on proposals around its Action Plan on Sustainable Finance, with Swedish buffer funds (AP1, AP2, AP3 and AP4) being the only specific owners to formally publish responses.
In May, the European Commission confirmed its first four legislative proposals to catalyse sustainable finance – a sustainable taxonomy, regulation on disclosure of sustainable investments and sustainability risks as part of fiduciary duty, low-carbon benchmarks and channelling retail investment into sustainability products.
The latter is being consulted on as part of re-drafting of MiFID rules.
The consultation on the other three legislative proposals recently closed with the sole asset owner response coming from the AP Funds.
Pension fund associations such as the UK’s Pensions and Lifetime Savings Association (PLSA) and Pensions Europe have not formally published responses.
In contrast, the European Fund and Asset Management Association (EFAMA) has responded. One of the main warnings in its position paper is that ‘ESG’ and ‘sustainability’ are used interchangeably in the legislative proposal on disclosures.
It says: “We need to make sure that we have consistent understanding, particularly in the context of taxonomy proposals possibly coming to define “sustainability” in a more prescriptive way than the market has done hithero.”
The UK’s Investment Association, representing UK asset mangers, has also responded. One of its key points is that environmental, social and governance considerations are not looked at in isolation in the context of the taxonomy. “An economic activity that has been deemed environmentally sustainable does not automatically become economically sustainable if it happens to comply with minimum social and governance standards,” it says.
This concern is shared by the AP Funds, who say in their response that: “It is important that the taxonomy system be supplemented by social aspects and corporate governance to make it more complete.”
It also says it must be updated on an ongoing basis to take account of future technologies, and be dynamic to be relevant to all member states.
The AP funds also question whether the European Commission should be the body to update a taxonomy in this area, saying “the process risks being politicised and bureaucratised”.
They say: “It would probably be better to use existing taxonomy from, say, Dutch pension funds, which have worked intensively to develop a taxonomy for investments, as well as existing standards such as GRI and TCFD.”The AP funds welcome more transparency as part of the Action Plan, and that financial advisors must consider clients attitudes towards sustainability. But they are cautious on the proposals around low-carbon benchmarks.
“We do wonder whether the European Commission should contribute to future indices being created,” they say. “We do, however, see it as a good thing to demand greater transparency about how indices are constructed.”
The APs also say carbon foot-printing has shortcomings and that active ownership of portfolio companies has been understated in the Commission’s proposals and ought to be highlighted more. “The risk under the current proposal is that a portfolio is sustainable on the surface only,” they say.
They note that a fund may sell off carbon-intensive assets to appear more sustainable under the taxonomy system, but then the asset may go to an owner with no regard for sustainability issues.
“The most important thing the European Commission can do is ensure that carbon emissions are priced in an efficient market,” they say.
While the Swedish funds’ are the only ‘on the record’ asset owner response, RI understands some organisations have had “unofficial discussions” with the European Commission.
The US Chambers of Commerce has also waded into the debate with a submission from its Center for Capital Markets Competitiveness.
Executive Vice President Tom Quaadman says: “While there appears to be growing market demand for sustainable finance, we believe that the market should ultimately drive this important agenda.”
Quaadman adds: “Among the considerations that have been discussed in our conversations is the potential to overwhelm investors with information, which could frustrate their ability to make decisions.”
The letter specifically highlights concerns with proposals to make remuneration consistent with the integration of sustainability risks and sustainable growth.
The consultation responses will feed into the European Commission’s final legislative proposals that will be debated by the European Parliament and Council before final texts are agreed upon. This is expected in early 2019, after which member states have two years to implement the proposed legislation.
RI understands that there are concerns the work is being rushed to ensure the proposals are put through before the term of the current European Commission ends next year. One insider said: “I fear we are short-changing investors by pushing this forward so quickly. They will have to finish every thing in November, and have a last vote by January at the latest.”
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