‘Who else should we regulate?’: EU throws open sustainable finance agenda for public feedback

Rules on director pay, shareholder voting and ESG loans are among those up for grabs in new consultation

The European Commission has launched a consultation to help it decide on its next sustainable finance policy package, suggesting – among other things – that it could intervene in the green bond and sustainability-linked loan markets, and more tightly link directors pay with non-financial performance.

“The financial system as a whole is not yet transitioning fast enough,” says the 38-page consultation document, launched yesterday. “Substantial progress still needs to be made to ensure that the financial sector genuinely supports businesses on their transition path towards sustainability, as well as further supporting businesses that are already sustainable.”

"While asset managers play an important role in providing investors with the information they need to make informed decisions, ultimately it is the investor who makes investment decisions” – EFAMA 

The Commission argues that the current COVID-19 pandemic "underscores some of the subtle links and risks associated with human activity and biodiversity loss. Many of the recent outbreaks (e.g. SARs, MERS, and avian flu) can be linked to the illegal trade in, and consumption of, often endangered wild animal species”.

“Therefore, it is important – now more than ever – to address the multiple and often interacting threats to ecosystems and wildlife to buffer against the risk of future pandemics, as well as preserve and enhance their role as carbon sinks and in climate adaptation.”

The first set of questions posed in the consultation paper are aimed at everyday citizens and include whether they know where their savings and pensions are invested, if they would like more opportunity to invest sustainably, and whether they think it should be mandatory for companies and financial institutions to disclose their alignment with climate goals.

The lion’s share of the consultation is aimed at experts in finance and sustainability. A wide range of topics are addressed, including:

–          The Just Transition

–          Climate scenario analysis

–          Biodiversity

–          Disclosure

–          Mandatory due diligence on sustainability

–          Appropriate accounting standards

–          ESG ratings and data

–          A ’brown’ taxonomy

The Commission asks whether the EU should “develop standards” for the growing sustainability-linked bond and loan markets, suggesting such standards could be linked to its Green Taxonomy. Likewise, it mulls introducing standards for green mortgages and loans.

In another section, it points out: “The Shareholder Rights Directive II states that directors’ variable remuneration should be based on both financial and non-financial performance, where applicable. However, there is currently no requirement regarding what the fraction of variable remuneration should be linked to, when it comes to non-financial performance.” 

It then asks whether there should “be a mandatory share of variable remuneration linked to non-financial performance for corporates and financial institutions” and if a “defined set of EU companies should be required to include carbon emission reductions, where applicable, in their lists of ESG factors affecting directors’ variable remuneration”.

The consultation also acknowledges concerns over the ability for passive investors to engage with companies meaningfully. To foster engagement more broadly, it asks if “voting frameworks across the EU should be further harmonised at EU level to facilitate shareholder engagement and votes on ESG issues”, or whether “EU action is necessary to allow investors to vote on a company’s environmental and social strategies or performance”.

The consultation has already received some feedback. The European Fund and Asset Management Association (EFAMA) issued a statement today, saying it welcomed the move. It said, however, that the current COVID-19 crisis meant that “most corporates are now in survival mode and will most likely be for quite a while”, suggesting that this could require the relegation of environmental considerations in favour of an increased focus on social ones, “particularly human capital and societal imbalances”. EFAMA also questioned “whether this is the right time to dedicate a lot of efforts on the “G” factor, especially given the existence of corporate governance and stewardship codes”.

“Financial literacy and promoting sustainability awareness are somewhat sidelined in the consultation,” it observed, “despite being key for unleashing the full potential of sustainable finance. While asset managers play an important role in providing investors with the information they need to make informed decisions, ultimately it is the investor who makes investment decisions.”

A number of NGOs praised the Commission for releasing the consultation despite the current Coronavirus pandemic. Sebastien Godinot, a European Policy economist for WWF, said “measures considered in the consultation, like expanding the EU taxonomy to define polluting activities, setting climate targets in the private sector and giving consumers a say on the sustainability of their financial products, will be critical” .

The consultation will be available for comment until mid-July, and the policy package – known as the Renewed Strategy – is expected in September.