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The Big Picture: A crucial period ahead for European sustainable finance policy

RI takes a look at all the moving parts across HLEG, the Commission and Parliament

“This is a race.”
Those were the words of Olivier Guersent, Director General of the European Commission’s Directorate-General for Financial Stability (DG FISMA), when he discussed sustainable finance with a room full of European policymakers, politicians, financiers and NGOs in Brussels last month. “The reason we derived a competitive advantage in mobile telephony for 15 years was because we were the standard setters. And we will derive the same advantages if we are the standard setters for sustainability,” he added. “But for this, we need to move fast.”
Competition is hot, and the EU knows it. Having assumed the ‘responsible investment’ mantle back in the 1960s, Europe’s only real competitor for leadership in the space was North America, until now. “We are at a point in time where the US, at least at an institutional level, is disengaging,” said Guersent. “But the Asian region – under the leadership of China – is going very, very fast in the area of sustainability.”
Indeed, China, Indonesia, Japan and India have all created national-level green bond standards – something that has been left for the market to develop in Europe, resulting in accusations of a confusing, fragmented landscape for new entrants and non-specialists (although others believe it is important not to be prescriptive). The Association of Southeast Asian Nations has also created a regional set of Green Bonds Standards. China has just launched a carbon market that some say will dwarf the EU’s floundering Emissions Trading System. Hong Kong and Beijing are both making a play to become a ‘hub’ for sustainable finance, and regional environmental policy across China is in some cases even more aggressive than at national level. India has an unrivalled commitment to build new renewable energy capacity, while Japan’s public pension fund, GPIF (the largest in the world), has partnered with the World Bank to lead on sustainability integration in bond portfolios. And these are just a few initiatives in the region.
The race is well and truly on.
And Europe seems to be moving at breakneck speed. The Vice President of the European Commission, Valdis Dombrovskis, tweeted recently that the first legislative proposals on sustainable finance would be made this year, on the back of the Commission’s Action Plan on Sustainable Finance, which RI understands will be launched on March 7 and discussed at a dedicated conference in Brussels on March 22.

The legislative proposals, expected in April or May, will focus on investor duties. The two other priorities identified in a speech by Dombrovskis in December, are sustainable taxonomies and a ‘green supporting factor’ – a banking incentive linked to capital requirements.
All three initiatives are due to feature in the final recommendations of the High Level Expert Group on Sustainable Finance, which will be announced this week. There has been plenty of speculation as to how HLEG’s proposals would evolve following the publication of its interim report last summer. The 20-strong group created around eight “early recommendations” in July, which were put out to public consultation until September. In October, RI reported that these would be whittled down to just five, based on comments made by the HLEG Chair, Axa’s Christian Thimann. However, other insiders told RI the initial recommendations would be expanded on, not compressed. Now, it seems, the final report will contain around 30 recommendations – depending on interpretation – which are structured in tiers, to indicate the varying levels of importance, and how concrete the proposals are.RI understands that among the top tier of “key recommendations” are the development of a sustainable finance taxonomy and associated labels/standards; clarity around ESG in the context of fiduciary duties; the creation of an infrastructure ‘matchmaker’ between investors and project developers; and changes to the mandates of the European Supervisory Agencies (ESAs). It is worth noting that the concept of a ‘green supporting factor’ does not make it into the top tier, suggesting some misalignment between the priorities of Dombrovskis and the views of HLEG.
Once the report has been released, the Commission has around six weeks before it will publish its official response, within its Action Plan on Sustainable Finance. The Action Plan will not be restricted to the HLEG recommendations, though – the Commission can address broader options or initiatives around sustainable finance policy in Europe if it wants to.
The same goes for the European Parliament, which is already heavily engaged in moving things forward on sustainable finance. As well as announcing “open conflict” with the Commission over ESG in retail investment regulation in December, the Parliament is also wading through the recommendations made by the Commission in a formal communication to the ESAs last September. The communication related to a broader overhaul of the ESAs – the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pensions Authority (EIOPA) – but includes a nod to HLEG’s recommendation: calls for the legislative proposals underpinning the bodies to be amended to make sustainability part of their mandate.

This would impact the EU-level supervision of banks, credit ratings agencies, insurance and pensions.
As well as formulating its response to the ESAs proposals, the European Parliament is also finalising amendments to potential reforms of capital requirements in the EU. These may include the introduction of a Green Supporting Factor.
And this week, Parliament will also release the first draft of its Own Initiative Report on Sustainable Finance: a “tone-setting” document – rather than one with any legal weight – that will outline Parliament’s views on sustainable finance. It was kick-started independently from the HLEG initiative, but will contain some responses to the latest recommendations, calling on the Commission to make moves on various issues, including sustainability taxonomies, RI understands. Led by rapporteur and Green MEP Molly Scott Cato, the report will be voted on in April.
So there are plenty of changes afoot. And, if they do happen (some insiders worry they will be too drastically “watered down” through the EU negotiation and lobbying processes), many are expected to be enacted as part of bigger overhauls to existing regulation – such as the mandates of the ESAs, the IORP II pension directive, Capital Requirements Directive (CRD) and the Non-Financial Reporting Directive.
“We are trying to develop an overarching EU strategy on sustainable finance,” said Guersent, adding that Europe needs to focus more on equity financing, maximise the long-term potential of its citizens’ savings, and curb the “huge appetite for the short-term”.
“In the finance industry, people are not completely insensitive to the concept of profit. So if you do not do it because you think it’s good for the planet, do it because it’s profitable.”

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