François Passant: The European Union’s Capital Markets Union – a capital initiative?

Eurosif’s Executive Director argues for greater sustainability elements in the EU’s bold plans

On face value, it does not look like European Commissioner Jonathan Hill has a busy agenda. The 2015 European Commission Work Program for the Directorate-General for Financial Stability, Financial Services and Capital Markets Union (‘DG FISMA’) that he heads references only two new initiatives: the Capital Markets Union (CMU) and a framework for the resolution of non-banks.
A sharp contrast with the regulatory wave that followed the global financial crisis.
Of course, one should not forget the 412 so-called “Level 2” measures (at technical level) that are on the table and that he has to deal with this year and beyond. Nevertheless, Hill is likely to devote much of his attention to the Capital Markets Union initiative.

Why? The CMU is an essential part of the three strands underlying Commission President Jean-Claude Juncker’s bold investment plan to revitalise investment in Europe and restore growth: first, the mobilisation of at least €315bn in additional investment; second, targeted initiatives to make sure that this extra investment meets the needs of the real economy; and, third, measures to remove barriers to investment.
The role of well-functioning capital markets in Europe would be to “unlock the capital around Europe that is currently frozen and put it to work in support of Europe’s businesses, particularly SMEs”. This should offer greater diversify in the sources of funding for companies and mitigate reliance by EU businesses on bank finance.
As part of this objective, the ‘Building a Capital Markets Union’ green paper published on February 18 (the consultation ends today, May 13) outlines five key principles on which the CMU should be based, the central principle remaining that an EU-wide capital markets union should benefit the real economy, jobs and growth.

In practical terms, the CMU is intended to remove the barriers between investors’ money and investment opportunities; second, it should clear obstacles that are preventing those who need financing from reaching investors; and finally it should make the system for channeling those funds – the investment chain – as efficient as possible.The Green Paper insists on the need to channel more funding to SMEs, the largest job creation area, and to long-term investment projects, in particular infrastructure.

The Green Paper offers a range of suggestions such as revising the Prospectus regime and revitalising “sustainable securitization”, and consultations are also underway on this. European Long-Term Investment Funds (ELTIFs), just adopted by the EU, are also seen as a key way to bridge the gap between investors and long-term projects. More importantly for the SRI community, the Commission also mentions ESG investments and green bonds as a promising area with the implicit idea of exploring how to further grow these types of investments. While the wording in the Green Paper signals some focus on “vehicles” (green bonds, EuSEFs), rather than investment approaches, ESG is on the map for the first time, an important move.
Of course, Eurosif welcomes the CMU initiative. Who would not? Having said this, we believe that the CMU is also a unique opportunity to catalyse systemic change in capital markets by addressing excessive short-termism and align them not only with an economic growth imperative but also with sustainable growth. Unfortunately, the Green Paper does not say much about this.
The challenge is to convince policy-makers that sustainability should be a central theme today in the context of the CMU. My last article for RI explained how challenging the current EU context was in that regard. In addition, the window of opportunity is limited as the Commission will be publishing an Action Plan in September of this year based on the consultation’s outcome. The Action Plan will determine further work streams and it is vital that it includes elements of sustainable and responsible investment.
This is why Eurosif has just published a Manifesto for a Sustainable Capital Markets Union. The document, assembled with the input of our members and affiliates, identifies five priority areas to ensure that the CMU delivers sustainable, long-term growth that serves the real economy and current and future generations of EU citizens:

1. Incorporate a strong and comprehensive corporate disclosure policy package;
2. Ensure that environmental, social and governance considerations are incorporated into investment practices;
3. Align incentives to reward corporate and investor stewardship practices reinforcing long-term value creation;
4. Promote a sound corporate governance framework via active and long-term oriented share-ownership;
5. Scale-up long-term sustainable growth by leveraging financial innovation (such as green bonds).

The Eurosif Manifesto suggests a series of specific policy recommendations around each of these priority areas. Examples would include: mandating relevant corporate climate information disclosure, fostering integrated reporting, be more explicit and specific in the IORP II [pension] directive proposal about non-financial (ESG) risks, expand the concept of “stewardship” (for example to investment consultants) and tackle operational barriers to cross-border voting. They also include making environmental and social screeninga standard feature of all investment vehicles and financial instruments aligned with the CMU objective, such as ELTIFs.

It is important that the responsible investment community engages with EU policy-makers to demonstrate that ESG and good stewardship are essential elements of well-functioning capital markets and important contributors to long-term value creation, both for EU companies and investors. Eurosif is also of course engaging with various EU officials on this topic and is in the process of reaching out to other like-minded organizations to maximize our impact.
Let’s hope that EU officials will recognize the materiality of these factors for European businesses and investors and, to paraphrase Commissioner Hill, let’s hope that “generations from now, people across Europe will look back and think: after some difficult times, they refocused on the priorities, they made the right policy choices to restore economic growth and jobs; they got it right”. Because CMU is for the long-term.

François Passant is Executive Director of Eurosif.