Molly Scott Cato, who is UK Green Member of the European Parliament (MEP), has two launches set for this week.
There’s a report starting to outline the European Parliament’s position on sustainable finance and there’s a new website the Bad Boys of Brexit [Scott Cato is the Green Party’s speaker on Brexit].
Scott Cato, who is a member of the Parliament’s Committee on Economy and Monetary Affairs (ECON), says the website is an attempt to stop the process of the UK leaving the European Union and tells Responsible Investor the City will lose its leadership role on sustainability matters in the event of an exit.
She says: “Mark Carney at the Bank of England has been leading on this agenda, and so has Andy Haldane [chief economist at the BoE]. They were quoted in the HLEG [the European Commission High-Level Expert Group on Sustainable Finance] report for the important work they have been doing around stranded assets.
“The City leads on a lot of equity finance and securitisation and they need to be clear about where the risks are. So it’s not surprising that the City has been leading and we won’t be able to anymore.
“There are really good economists at the Bank of England doing farsighted work and a good job and all that expertise won’t be shared in the same way as it is at the moment when they aren’t part of the decision-making institutions.”
Earlier this week, ECON met with HLEG chair Christian Thimann to speak about the final recommendations it released this week to the European Commission in the context of the European Parliament’s ‘own-initiative report on Sustainable Finance’.
She notes her embarrassment at ECON member and UKIP MEP David Coburn saying that “he’d worked in the City and sustainability was not commercial”, but expects few disagreements and for the Committee to adopt a final text in April.
The Parliament’s own initiative report on Sustainable Finance predates the HLEG work, and was started by Scott Cato, who is rapporteur, to clarify its position on the issue. She said the timings work well with the Sustainable Finance Action plan due from the Commission in March.
Scott Cato warmly welcomes the HLEG report that was released this week, saying it is a tremendous and heart-warming achievement with a following wind behind it.
“In specific terms, I particularly like the fact that they have extended beyond climate risk,” she says. “We already have a general agreement that fossil fuels are a risky investment because of the Paris agreement. But they have gone beyond that and talked about other environmental and social goals. They have drawn particular attention to sustainable intensive farming which I think is the next big risk to the financial markets.”Scott Cato also welcomes the calls around sustainability and fiduciary duties and clear reporting to cascade right down the investment chain on green and sustainable investment.
She expects the European Commission to turn investor duties into a legislative proposal first but expects work on a sustainable taxonomy to take longer.
For Scott Cato, a taxonomy is vital and RI understands that the first draft of the Parliament reports calls for a credible EU Green Taxonomy to be established by 2019. She says the Parliament is still trying to work out a position on sustainability and capital adequacy rules and the conversation is already happening as part of the Capital Requirements Directive.
Scott Cato’s own view is that she doesn’t want to create a new sort of bubble based on green supporting factors – broadly lower capital requirements for green lending.
“Just because something is sustainable it doesn’t mean it necessarily will bring a higher return, or is less risky. I think we have to be really careful about how we balance the requirements for sustainability that are social and those that are risk-based. I don’t see any reason to reduce the capital requirements as they currently are.”
On the mandate for European Supervisory Authorities (ESA), the current Parliament report says there should be a sustainability requirement. It also goes further then HLEG on this issue calling for mandatory stress-testing of all financial organisations, starting with carbon stress testing and moving into defining other possible stranded assets.
Another stronger call in the report is on mandatory disclosure of sustainability risks. “We think this should be brought forward in the review of the Non-Financial Reporting Directive. When we met with Christian Thimann he gave various pragmatic reasons on why he didn’t want to do that but I am pretty confident that the Parliament will call for mandatory disclosures like the French in their law [Article 173].”
Scott Cato expects some compromises but is hopeful on agreement on most issues.
The Parliament’s report was put together with help from various NGOs, including ShareAction, which said: “The scope of the report is ambitious and we expect the Parliament to produce a final report which will serve to influence the Commission’s Sustainable Finance Action Plan, as well as help shape subsequent legislative proposals on the topic for years to come.”
But, Scott Cato is worried about timing with the current Commission and Parliament’s terms coming to an end in 2019. “We’ve got to pass a few crucial, fundamental things in the next 18 months or so, before this Parliament runs out.
“And that’s a tall order. I hope they will bring some things forward in May and we can get them through because the Parliament are signed up to sustainable finance, we voted through the Paris agreement. We are committed to this agenda.”