The package, focused almost exclusively on climate finance, is a welcome first step but will need strengthening and expanding if it is to reorient capital flows towards more sustainable investments (the first goal of the EC’s Action plan on Financing Sustainable Growth).
Indeed, the proposals and their impact assessment do not give priority among their objectives to the shifting of capital towards sustainable investment.
1 The requirement to disclose how sustainability risk is integrated in the investment decision-making process is an important first step. However, we do not think that disclosure on its own will shift the trillions necessary to align financial flows with a pathway towards low-carbon and climate-resilient development. As the Commission acknowledges, under its proposals “the magnitude of the reoriented capital flows will depend on the actual interest for sustainable products”. We therefore strongly welcome the move to require institutional investors and asset managers to consider the ESG preferences of their clients in their decisions, as part of their duties towards investors and beneficiaries. It will be important that the Delegated Acts that the Commission proposes to implement this requirement contain enough detail to make the requirement effective.
2 ESG factors are about more than financial materiality. Some ESG factors are not and will never be financially material. This could be due to different time horizons: for example, the risk of stranded assets may not materialise until there is adequate CO2 pricing or the transition to a low carbon economy is more advanced. Yet, the European Emission Trading scheme (ETS) has not been able to deliver a meaningful price and without further revisions to align it with the Paris Agreement goals, the CO2 price will not be able to reach the range of values indicated in the Stiglitz-Stern report. Or the lack of financial materiality could be due to the nature of the ESG impact, for example the social externalities linked to land-grabbing or other harmful activities.
Therefore, we cannot agree with the statement in the Commission’s Impact Assessment that accepting lower risk-adjusted returns is automatically against the best interest of their clients. Clients’ utility can depend on both financial and non-financial returns and therefore the interpretation of best interest should not be reduced to the objective of maximising risk-adjusted returns. To support this, it is essential that investors engage proactively with clients to understand their non-financial interest as well as their financial interests. Tapping into clients’ non-financial interest is more likely to lead to investments that improve the welfare of both clients and society.
3 The proposed sustainability taxonomy at EU level needs expanding. We welcome the taxonomy proposal which might help to address the problem of greenwashing in a harmonized way at EU level. We urge the Commission to adopt stringent and unambiguous criteria for determining the conditions in which economic activities can be said to contribute substantially to environmental objectives. However, we regret that the Commission has not gone further on social sustainability or explored a classification for brown assets. Unless the Commission intends that any investment not covered by the taxonomy should be considered unsustainable, a brown taxonomy will be needed to complement the sustainability taxonomy and promote the capital shift away from unsustainable investments. Finally, while the title of the proposal is very ambitious and implies that the taxonomy would cover a broad range of sustainability aspects, the content of the proposal is exclusively focused on climate.
4 The proposed low-carbon and positive carbon impact benchmarks should refer to the sustainability taxonomy. The proposal makes it clear that the benchmark administrators will not be required to use the EU taxonomy when selecting the underlying assets. This seems to conflict with the overreaching objective of providing clarity on which investments can be counted as sustainable.
Benoît Lallemand, Secretary General, said:
“The Commission seems to be pinning its hopes on raising investors’ appetite for sustainable products. While we support creating a more favourable investment environment for sustainable products, the Commission’s proposals do not address the main source of the problem – a lack of incentive in an economic system characterized by severe negative externalities, notably climate change.
“Without economic regulation to level the playing field between sustainable and unsustainable investment and measures to put ESG factors at the heart of investment decisions, it is unlikely that the capital shift will happen at sufficient scale. This shift also requires measures addressing excessive speculation and short-termism in financial markets. Finally, we will not have a sustainable financial system as long as large-scale tax evasion is not tackled. We will keep engaging actively with the Commission and all stakeholders to support an optimal public interest outcome of this crucial agenda.
Nina Lazic, Research and Advocacy Officer, said:
“Our current economic system imposes severe negative externalities and as a result financial markets tend to reward companies that exploit weaknesses in environmental and social legislations. If this were not the case, there would be no need to fill an investment gap for sustainable assets. ESG investing – in all its aspects – must become the default option, not a hoped-for side effect.”
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In line with the rules of the ordinary legislative procedure, the European Parliament and the Council will now work on the proposals on low carbon benchmarks and positive carbon impact benchmarks; on taxonomy; and on disclosure requirements for financial market participants with regard to sustainability risk. The proposals can be downloaded from the Commission’s Sustainable Finance webpage:
The Delegated Acts that would implement the proposal for ESG factors to be considered in the investment decision making process are open for feedback until 21 June 2018 at the following links:
 Commission action plan on financing sustainable growth https://ec.europa.eu/info/publications/180308-action-plan-sustainable-growth_en
 The Report of the High-Level Commission on Carbon Prices, May 2017, concluded that “the explicit carbon-price level consistent with achieving the Paris temperature target is at least US$40–80/tCO2 by 2020 and US$50–100/tCO2 by 2030, provided a supportive policy environment is in place.”
 See page 39 of the Impact Assessment, accompanying the Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment, and Proposal for a Regulation of the European Parliament and of the Council on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU) 2016/2341 and Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) 2016/1011 on low carbon benchmarks and positive carbon impact benchmarks.