An “Action Plan” of sorts seems to be emerging from the EU on sustainable finance. However, sadly, one must place quotes around the phrase “action plan” as the work underway appears to make it anything but. There are ways forward, however, that could change this.
While we are mostly in the “it’s all good” camp these days on just about anything related to responsible, sustainable or impact investing (given how little we have actually solved so far), a plan that simply rehashes work underway runs the risk of being just one more report on a shelf when what’s needed is a plan that really generates more positive action.
We see three areas needing further consideration by the EU Action Plan’s Technical Expert Group (TEG), which are as follows:
1) The primary focus of the EU effort should not be on taxonomies.
There should instead be recognition of the sizeable work that has already gone into this area, and which will continue to, from the work of the GRI through to the varying bond standards such as that which emerges from the likes of the Climate Bonds Initiative. The EU’s Sustainable Finance efforts, given that the technical expert group’s tenure is temporary by definition, should instead note that it will observe and adopt existing taxonomies, and focus on actions that might be taken in future if such taxonomies are not robust. New taxonomies certainly won’t be solved by a temporary panel which is scheduled to end in the middle of 2019. Why reinvent the wheel unless existing taxonomy effortsare clearly insufficient, and there has been no evidence of insufficiency to justify a new taxonomy approach? Unless I’m missing something, the EU has already spent millions of Euros chasing the concept of “climate performance metrics” without any tangible result. It’s unclear what that was even supposed to be about. Taxonomies and the successful implementation of bond standards are complex issues, including the tension between adding additional costs while wanting to encourage a maximum flow of new confident capital. Rehashing existing taxonomies without adding anything new won’t improve matters. If there is something the EU was hoping to add to ongoing taxonomy work, it should be clearer on what it is and why specifically it is taking this approach.
2) Risk, regionality and misdirection.
First of all, on risk, the Taskforce on Climate Related Financial Disclosure (TCFD) effort to date has yielded little to no badly needed incremental investment action. Therefore, this EU effort on sustainable finance would be wise to ensure it is not relying on what has become arguably one more excuse for delay, or be seen as part of what might be called unintentional obfuscation. Until we see a TCFD report that says in effect “we are fine for the next five years,” then the TCFD will not have created more action other than raising some minor degree of awareness at a time when the IPCC recently made clear that dramatic transformation of the energy system is required. We can’t have an urgent need to act coincide with all investors concluding they are fine for the next
important to consider. For example, in the EU individual investors are much less relevant by assets managed as compared with pension funds and other forms of institutional investors. So, EU recommendations should be focused on changing these bodies. Yet, these are the bodies largely involved in making these recommendations! Can a panel of experts from investors themselves be relied upon to make the right recommendations? Can the EU consider recommending, for example, improvement in the culture of institutional investors, to ensure they are five years. Regionality is also educated on sustainability, especially on climate? Improved awareness within institutional investors would appear to be a top priority, but the current EU effort seems to be avoiding this altogether. Hence the risk of ‘misdirection’. There’s much of that going on elsewhere as well; just this week US SIF’s latest biannual report, on page 2, describes a majority of US sustainable assets coming from some mystery source of 7 trillion dollars. Let’s stop the exaggerations. The field is growing and becoming significant, but trust more generally will follow from realistic pictures. The EU also is focused on low carbon indexes and greenwashing; fair enough. Too many large asset owners are doing a partial at best job on this front. Low carbon indexes must be conscious of all scopes of the footprint of organizations, or miss the majority of impacts as we described before in this Montreal Carbon Pledge piece here on Responsible Investor. Take a read of this essential Tom Burke speech on action on decarbonization and let’s see steps taken to ensure EU recommendations on sustainable finance create this sort of badly needed substantial action.Yet there seems to be no ambition of this nature in these EU sustainable finance action plans. Misdirection is essential to avoid for these action plans to be a success.
3) Incrementalism. For whatever reason, bodies like this EU Action Plan seem to go to great pains not to ask more from investors, who often instead sit on panels and boards such as this and instead ask others to do more! For example, the “Implementing the Action Plan” document calls for more taxonomy, but not a taxonomy on possible investment actions. Calls are made for more disclosure from companies instead. The work we did for the PRI leading up to COP 21 overseeing the development of a Climate Change Asset Owner Framework, called for
a) first and foremost, more sustainable investment allocations, b) executing on responsibilities when owning positions or managing outsourced relationships, and c) selling when the business case and engagement look likely to fail. This work informed the recent Investor Agenda, but all of these are voluntary efforts, as is of course the PRI itself which sits on the Technical Expert Group. More action is possible where investors can be seen performing to a minimum standard of investment strategy having achieved certification, as one example. Holding investors to a minimum standard of action is a step which not only could but perhaps should be considered, if we are to move the system as a whole forward. Whatever steps it does take, the EU needs to prioritize steps which ensure that meaningful action occurs, and measure what that action is over time, or it will not have achieved anything useful at all.
Cary Krosinsky is the Founder of Real Impact Tracker