Why the EU’s new High-Level Expert Group on Sustainable Finance is a significant development

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The European Commission is recruiting experts to help with its ambitious plans to scale up green and social finance through the Capital Markets Union (CMU) plan to mobilize capital in the European Union.

The 20-strong “High-Level Expert Group on Sustainable Finance” will include representatives from asset owners, asset managers, banks, financial infrastructure operators, data providers, research houses and NGOs.

“The Paris Agreement on climate change includes the commitment to align financial flows with a pathway towards low-carbon and climate-resilient development,” the Commission explains in its call for applicants. “This commitment and growing awareness of the urgency to address climate change, other environmental degradation and sustainability risks call for an effective and overarching EU strategy on integration of effective policy provisions in the EU financial policy framework.”

Niall Bohan is Head of Unit for CMU at the Commission’s Directorate General for Financial Market Stability (DG FISMA) and says the expert group “will establish the tool box we can work with as we move forward on this,” adding that it “has the potential to become a very significant piece of work.”

The tools being assessed haven’t been set in stone, but Bohan says he expects the working group to look at possible methods for internalising climate risks (such as stress testing portfolios), incorporating ESG into fiduciary duty guidelines, increasing disclosure, and developing standards and definitions relating to climate finance and measurement.

The CMU is the Commission’s bid to build a more integrated capital market across the EU by 2019. It will focus on directing capital to those projects and investments that will stimulate growth and job opportunities, creating more opportunities for investment, and removing barriers for cross-border investment.

Making the retail market more sustainable is potentially the trickiest piece of the puzzle, Bohan says, but a crucial one. “If we get it wrong, it could totally distort the market.”

One possible option is for environmental, social and governance criteria to be integrated into legislation regarding Packaged Retail and Insurance-based Investment Products (PRIIPS) – rules that will come into force in 2018, requiring asset managers to provide ‘key information documents’ to retail investors to help them assess products.There is an option to include disclosure around the ESG performance of products through this legislation.

“The legislation was created to permit ESG integration, which can be made mandatory through the creation of secondary legislation,” Bohan explains.
While the Paris Agreement only addresses climate, the UN’s Sustainable Development Goals and “the importance of long-term and sustainable investment to maintain the EU’s competitiveness” are other reasons the Commission claims “the current financial system needs to be better aligned with EU policies in support of sustainable growth and investments”.

“Dealing with these issues at national level is often fragmented and ineffective, unless it’s coordinated properly at EU level,” Bohan told an audience at last week’s Eurosif conference on responsible investment in Brussels. “Saying that, EU policy around these topics has at times been reactive, and that’s been a problem too. But the dynamics around climate finance are becoming clearer, and there is a growing awareness of the scale of what’s needed. A more joined-up approach is required to make sure Europe stays out in front on green issues.”

And the Commission wants to move on this with notable swiftness. Echoing the ambitions of the Financial Stability Board’s Taskforce on Climate Related Disclosure – the international body tasked with developing guidance for voluntary climate reporting (of which the European Commission is an official observer) – the working group will have just six months to produce its first report, outlining its high-level objectives and identifying the “tool box”. It is then expected to develop these into final recommendations by the end of 2017.

“Once the guidance has been delivered, we have to work out which elements we can adopt and how far we can run with them. We also need to work out the extent to which the science and metrics exist currently that can address climate risks effectively,” says Bohan.

Despite the working group’s recommendations being created to a pretty tight deadline, Bohan insists that any changes will take place more gradually. “We won’t shoot from the hip. We want to approach this armed with a set of first principles.

“It’s not about creating red tape or unnecessary tick boxes that may result in a perverse outcome – and recommendations will be phased in.”

The application period for the working group runs until next Friday (25th November), with the first meeting slated for January.

“Next year will be about thinking our way through this,” says Bohan. “2018 will be decision time.”