European Parliament committee calls for development of ESG model mandates

Draft proposal returns to idea of a model contract between asset owners and managers

The European Parliament’s Committee on Economic and Monetary Affairs has released the first draft of its report on sustainable finance that among other things calls for the development of regulatory model mandates between asset owners and asset managers with expectations on ESG risks and beneficiary interests.

Industry-led ‘model mandates’ that reflect ESG in contracts have been developed by organisations such as the International Corporate Governance Network (ICGN), but this is believed to be the first time a regulatory version has been mooted at a European political level.

The Parliament’s ‘own-initiative’ 11-page Report on Sustainable Finance is being prepared to clarify its position on the issue and will influence the European Commission’s soon-to-be released Sustainable Finance Action plan developed with support of the High Level Expert Group (HLEG) on Sustainable Finance.

The HLEG released its final report earlier this year, and while it spoke of minimum stewardship standards and the reflection of clients’ views in investment mandates, the European Parliament’s draft report goes much further.

It calls on the European Supervisory Authorities (ESAs), which together oversee banks, insurers and pension funds, to develop guidelines for model contracts, which would clearly incorporate the transmission of the beneficiary interest as well as clear expectations as regards the identification and integration of ESG risks on behalf of the asset manager.The report, like HLEG calls for ESAs to have a sustainability mandate, but it also goes further – calling for mandatory stress-testing of all financial organisations, starting with carbon stress testing and moving into defining other possible stranded assets.

Other calls include a robust and credible green taxonomy to be established by the end of 2019, fiduciary duty to include an obligation to include ESG factors and for stewardship to form an integral part of the legal duties of investors.

The report also says the European Investment Bank should only agree to future lending that is compatible with 1.5 degrees climate limit.

It also calls on the European Central Bank to redesign its asset purchase programmes under quantitative easing to align with the Paris Agreement and ESG goals. It says such as redesign may act as a pilot for establishing a future sustainability taxonomy.

UK Green MEP Molly Scott Cato is ‘rapporteur’ for the sustainable finance report and in an interview with RI this month said she expected some compromises with MEPs but is hopeful of agreement on most issues. The ECON committee is expected to adopt a final text in April and a plenary vote of the whole Parliament on the text is currently set for late May.