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Page 2 - HLEG. A sustainability test for the regulatory process: a good start

The Commission urgently needs to develop a sustainability impact assessment methodology, since it indicated it was willing to take the HLEG interim report into account. New legislative initiatives are in the pipeline, such as the review of the three European Supervisory Authorities (ESAs): one for banking (EBA), one for the financial markets (ESMA) and one for insurance and pensions (EIOPA). These ESAs are also responsible for drafting technical standards or guidance on EU financial laws. Experience over recent years has shown that their technical standards and guidance can have a great influence on how EU financial laws are implemented, and therefore what their impact is on the economy and stakeholders, including on social and environmental aspects. The ESAs will need to do a sustainability test of their technical standards and other guidance instruments.

Recent legislation such as occupational retirement provisions (IORP II, 2016) and the proposed pan-European pension fund product (PEPP) stipulates that investors should cover ESG risks (IORP II, Art 25) or disclose whether they take ESG factors into account (PEPP, Art. 27, 29). A sustainability test of the upcoming review of the ESA legislation should ensure that ESAs can duly propose technical standards and guidelines to implement these laws, within the current mandate or with a new mandate if need be (see also ‘early recommendation’ number seven in HLEG’s interim report).

The ultimate test however, will be for the financial industry itself to assess whether EU legislation around sustainable impact assessments, and ESG considerations integrated into EU law, will have a positive impact on the ground. Case studies by civil society organisations and researchers, including SOMO, have experienced that effectiveness of these kind of ESG criteria is not easy to assess: often negative impacts on the ground are exposed only after careful cooperation with local or domestic organisations, for example. Research in financial databases are used to detect the linkages between particular companies and their financiers (often different forms of loans and different investor types from numerous jurisdictions).

Institutional investors with shares in large international companies may not be provided with detailed information about companies that belong, directly or indirectly – sometimes through tax havens – to these companies. This means that assessing the real impact will be more costly than current standardised practices and on-screen financial figures; and even more than paying for extra analysis by responsible investment rating agencies that do not do on-site visits. Within the financial chain, from issuer or borrower to the ultimate investor or lender, the costs of these impact assessments will have to be internalised. Such on-the-ground impact assessments will enable the financial sector to become more viable and profitable over the long term.

The ESAs will need to do a sustainability test of their technical standards and other guidance instruments.

The Commission’s improved impact assessments should be done with due resources, consider the experiences of earlier reports and that of the financial industry, and be based on implementation studies. They should clarify what kind of legislation (e.g. promoting passive investment or supporting the financing of small innovative sustainability initiatives) is the most suitable in order to stimulate – and if needed, enforce – sustainable finance. They should also provide guidance on what kind of requirements within the legislation is needed: for example, only requiring disclosure of whether ESG factors have been taken into account, or requiring particular ESG measurements and opportunities of what is being financed.

Myriam Vander Stichele is a Senior Researcher at the Centre for Research on Multinational Corporations (SOMO), a Dutch-based not-for-profit.

To give feedback on the group’s interim report, published in July, see here.


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