EU group set to propose new mandate rules, ESG definitions and ‘eco’ labels

HLEG final report seen as a “manifesto for far-reaching change”.

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The High Level Expert Group on Sustainable Finance (HLEG) will present its final recommendations to the European Commission, requesting the creation of a sustainable finance classification system, pan-Europe rules on how investors must consider sustainability in mandates, and the development of EU-level green bond standards – among some 30 proposals. Top EU officials are calling it a “manifesto for far-reaching change”.

RI yesterday revealed some of the key recommendations in the report, which has been in the making for around a year. It follows the Commission’s decision to select 20 sustainable finance specialists to help it achieve a “deep reengineering of the financial system’ in Europe, and ‘steer the flow of capital towards sustainable investments; identify steps that financial institutions and supervisors should take to protect the financial system from sustainability risks; and deploy these policies on a pan-European scale’.

The recommendations, according to one member, are “nothing revolutionary” and “might seem like common sense if you’ve been in the [sustainable finance] market for any time”.

RI has seen a final draft of the report, which organises the recommendations into tiers based on their importance and how concrete the proposal is. The key recommendations, of which there are eight, include:
1. Establish and maintain a common sustainability taxonomy at the EU level
The taxonomy, which should begin with climate mitigation, should be developed by an independent working group, and address how projects or sectors support both the Paris Agreement and the Sustainable Development Goals.
2. Investor duties
All existing EU rules that deal with fiduciary duties should be updated to say that asset owners and managers must incorporate the time horizons and sustainability values of the end client into mandates, investment strategies and asset allocation “whether financially material or not”.
3. Upgrade disclosure rules to make sustainability risks fully transparent, starting with climate change
The EU should implement disclosure guidelines based on recommendations from the Task Force on Climate-Related Financial Disclosure. Companies should be encouraged to ‘experiment’ with relevant reporting, especially in key industries like energy, utilities and transport. This should lead to a set of ‘comply or explain’ disclosure principles for firms, specifying metrics such as the location of assets (and therefore vulnerability to climate change impacts) and the exposure of sales to products and services identified in the EU taxonomy.
4. Enhance the retail strategy on sustainable finance: investment advice, ecolabel and SRI minimum standards
According to HLEG, “very few retail investors” currently have access to investment opportunities that align with their environmental and social values. SRI products are often self-labelled and there are no standards or benchmarks to help assess the level of ESG integration in each.As a result, HLEG wants MiFID II to be updated to require investment advisors to ask customers about their sustainability preferences and then offer products accordingly (see separate story on investment consultants).

It also wants rules for greater transparency around the impacts and strategies of retail funds when it comes to ESG, minimum standards for SRI-labelled funds, and a voluntary EU-level green label for retail products.

5. Include sustainability in the supervisory mandate of the ESAs and extend the horizon of risk monitoring
This builds on work already being done on sustainability and the European Supervisory Authorities. The Commission proposed last year that the mandate of the three bodies, which oversee banking, insurance, occupational pensions and securities markets, is updated to include ESG considerations, particularly climate-related risk monitoring.
6. Develop and implement official European sustainability standards and labels, starting with green bonds
An EU Green Bond Standard (EU GBS) should be developed, followed by a label. Green bonds should ultimately be aligned with the EU taxonomy, looking at climate but also biodiversity and other green issues. Following in China’s footsteps, this would mean issuers could only issue an ‘official’ EU green bond if they adhere to the standards. HLEG wants a technical committee to be formed this year to take this forward, in tandem with the taxonomy technical group. Similar initiatives across other asset classes and sustainability topics should follow.
7. Governance and leadership
The Commission should update guidance from the European Central Bank and the European Banking Authority to clarify that sustainability risks and opportunities are part of broader considerations. The Stewardship Principles should be updated to require high standards of internal governance, the development of stewardship policies, assessment of investment portfolios, long-term engagement with companies, the use of voting rights and the promotion of long-term value creation and ESG considerations.
8. Establish Sustainable Infrastructure Europe
To build capacity and prevent ‘bottlenecks’ in project finance and other investment into sustainable infrastructure in Europe, HLEG is proposing the creation of a body – built on existing institutions – that will provide project development guidance on sustainable assets across Europe. It would help align the financing programmes of projects with the needs of institutional investors. It would become a stand-alone organisation by 2020.

For more HLEG coverage, click here.

Note: This article has been updated. The headline has been changed from ‘“SRI labels” to “Eco labels”, for clarity.