Nick Robins: Sustainable Finance after the HLEG: The end of the beginning

The High-Level Expert Group means 2018 has started with a bang

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In the world of sustainable finance, 2018 has started with a bang. The final report of the EU’s high-level expert group (HLEG) contains the results of one of the world’s most comprehensive exercises in connecting the financial system with sustainable development. Only China’s Greening the Financial System process comes close.

Importantly, it was China’s championing of green finance that provided the geopolitical context for the European Commission’s own road-mapping exercise. The decision to set up the HLEG came back in September 2016, just after the China’s Hangzhou G20 summit when green finance had for the first time become identified as a priority for the world’s leading finance ministers and central banks.

The HLEG’s final report contains 24 separate recommendations that cover nearly every aspect of the financial system. In policy terms, the fate of these recommendations is now in the hands of the Commission (which will release an action plan in March), the Member States and the European Parliament. But the HLEG’s impact goes far beyond the specifics of its individual proposals. I would like to highlight three big achievements and then look ahead to what happens next.

The first achievement lies in establishing sustainable finance as the core narrative. We all suffer from today’s alphabet soup of terminology and the accompanying blizzard of prefixes: climate, environmental, ethical, green, impact, mission-led, responsible and social finance. What the HLEG did was make sustainable finance the overarching term, a common-sense approach in the age of the Sustainable Development Goals (SDGs). It’s clear that the HLEG’s starting point was to finance the Paris Agreement and this is where much of its analysis is focused. But its vision is much broader, identifying sustainable finance as a core strategy for the EU to achieve its goals of economic prosperity, social inclusion and environmental regeneration. Looking beyond climate, the final report contains fresh thinking on other parts of the environmental agenda (notably around the nexus of agriculture, biodiversity and natural capital) as well as incorporating hitherto separate social finance priorities into its overall approach. Here, the final report identifies the importance of linking the largely metropolitan debate about sustainable finance with the needs of specific places across Europe. Understanding this spatial dimension is part of the broader effort to harness the financial sector in supporting a ‘just transition’ to sustainable development.

Narrative is crucial, but it needs well-crafted proposals for specific change to move markets and policy frameworks. It is here that the HLEG’s second achievement lies, with its interlocking set of key recommendations that consolidate best practice and respond to pressing market needs.

If we want to promote sustainable finance, we need to know what it is: so the HLEG proposes the world’s first taxonomy to bring clarity and build trust. A taxonomy is fine, but markets need data: here the HLEG makes specific proposals for implementing the results of the FSB’s Task Force on Climate-related Financial Disclosure (TCFD). Raw data is of course essential, but users of financial services need confidence that the products they buy meet their needs: so HLEG proposes a suite of European sustainable finance standards, starting with green bonds, along with a set of consumer-facing disclosures and labels. Standards are important to shape markets, but won’t on their own change financial culture: so the HLEG recommends the clarification of the duties of asset owners, investment intermediaries and financial advisers to ensure they both understand and respond to the interests and preferences of their clients and beneficiaries. Again, there’s no doubt that clarifying duties is vital, but this needs to be matched with real competence within financial institutions: so HLEG recommends updating ‘fit and proper’ tests for financial professionals to include sustainability factors.Even if these recommendations were approved, we need to ensure that they are actually implemented: so the HLEG calls for the European Supervisory Authorities (ESAs) to include sustainability in their mandates, particularly to focus on the mismatch in time horizons through the financial system. And all of these technocratic steps will mean little unless finance actually flows to support the real economy: so the HLEG recommends the establishment of ‘Sustainable Infrastructure Europe’. This would focus on building on the ground expertise across Europe so that the size and quality of the EU pipeline of sustainable assets can be scaled up.

The high-level group rightly spent the bulk of its time on the domestic agenda, focusing on what needs to be done to finance a sustainable European economy. Yet its third achievement is set to be the HLEG’s impact on the global agenda. The EU has long played a key role in shaping international norms on sustainable development, not least through its championing of climate action and its central position in finance for developing countries. The HLEG itself will have a demonstration effect, showing how countries can develop a consensus roadmap on sustainable finance; other countries, large and small, are likely to take inspiration and introduce their own HLEGs. Beyond this, the HLEG pinpointed the leadership role that the EU can play internationally. One way this could happen is through a set of ‘Sustainable Finance Compacts’ with key countries such as China to pool experience on boosting sustainable finance (for example through the development of sustainable financial centres).

The HLEG also identified the key international standard setting bodies where the combined voice of the EU and its Member States could help to embed sustainable finance into the rules that govern the global financial system. Two examples stand out: IOSCO and the IMF. The HLEG called on the Commission to work with the member states to encourage IOSCO to make sustainability disclosure mainstream across security markets. HLEG also recommended that the EU ensure that sustainability factors are incorporated into the work of the IMF, notably through its Article IV consultations along with the Financial Sector Assessment Program that it conducts with the World Bank.

On the final page of its final report, the Expert Group concludes that “the ultimate test of the HLEG will not just be the degree to which its specific recommendations are adopted, but the extent to which sustainable finance becomes a permanent feature of European markets and policy-making”. What gives me confidence that its vision and recommendations stand a good chance of being taken up is the way in which it helped to change Commission policy even before the final report was published. Examples of areas where these ‘early fruits’ were realised include the new strategy for the Capital Markets Union, the accounting treatment for energy efficiency investments, the role of the ESAs in sustainable finance and the duties of investors.

Looking ahead, two actions would really help to lock sustainability into Europe’s financial architecture. The first is to incorporate what the HLEG calls the ‘think sustainability first’ principle into the design, impact assessment and evaluation of all new EU rules and policies. The second is to establish a European Observatory on sustainable finance to monitor and report on progress. Beyond these practical steps, the priority now is to take the sustainable finance agenda from the European to the country level. Real engagement with national policymakers, financial institutions, enterprises, citizens and communities across the EU’s member states will make the difference and help to realise the huge opportunity that sustainable finance presents.

Nick Robins is Co-Director of UN Environment’s Inquiry into a Sustainable Financial System and was an observer on the HLEG.