On 31 January 2018, the final report of the High-Level Expert Group on Sustainable Finance (HLEG), an expert group established by the EU Commission to advice on developing a comprehensive EU strategy on sustainable finance, was published.

Priority recommendations expressed by the HLEG build on:

1.    Common sustainability taxonomy at the EU level

The HLEG has developed a framework for a sustainability taxonomy going from ‘explicitly climate change’ to ‘broader environmental sustainability and social sustainability’. It is designed as a ‘meta-framework’ and a classification of sectors, sub-sectors and associated assets. The HLEG recommends that the Commission develops it fully by 2020 through the establishment of a technical working committee with climate mitigation to be defined as first element in early 2018. The sustainability taxonomy would not be a standard by itself but standard-setters are expected to use the taxonomy to inform their respective standards.

Part of the sustainability taxonomy (Source: HLEG Final report)

 2.    Clarification of investor duties

The HLEG recommends to explicitly link the duties of investors to the investment horizons and sustainability preferences of the individuals and institutions they serve. The HLEG expresses the opinion that key EU financial services directives, such as IORP II, MiFID II and Solvency II, as well as regulations such as UCITS and AIFMD do not factor in sustainability to the level required. The HLEG recommends clarifying the duties of institutional investors as well as their asset managers to make sure that it could not be used as an excuse for not considering ESG factors in investment decisions. The HLEG recommends an EU omnibus proposal in order to cascade benefits across the entire investment chain, requiring the amendment of multiple EU directives.

3.    Upgrade of disclosure rules to make sustainability risks fully transparent

The HLEG recommends to endorse and implement FSB’s TCFD (Task Force on Climate-related Financial Disclosures) recommendations at the EU level and to draw on the experience of the implementation of Article 173 of France’s Energy Transition Law which requires listed companies, banks and institutional investors to evaluate, report and address their exposure to long-term climate-related financial risk. The HLEG recommends to consider ‘comply or explain’ disclosure principles on a set of metrics for companies based on the EU sustainability taxonomy.

4.    Retail strategy on sustainable finance through investment advice, ecolabel and SRI minimum standards

The HLEG recommends to require investment advisors to ask about and respond to retail investor’s preferences about the sustainable impact as routine component of financial advice. For now, MiFID I and II contain no specific requirements to ask clients about such preferences. The HLEG also recommends to establish a voluntary European green label for green themed funds that could fit in the framework of the existing ecolabel building on the most advanced European labels such as the LuxFLAG Climate Finance Label or French TEEC.

5.    Develop and implement official European sustainability standards, starting with green bonds

The HLEG recommends the EU to introduce an official EU Green Bond Standard (EU GBS) incorporating existing best market practice. An issuer may only use the term ‘EU Green Bond’ if it is, amongst others, aligned with the EU GBS and verified by an independent and accredited external reviewer. In a second step, the HLEG recommends to consider an EU Green Bond Label to help the market develop fully. The HLEG recommends to establish a Green Bonds Technical Committee in 2018.

6.    Establishment of ‘Sustainable Infrastructure Europe’

The HLEG recommends to establish ‘Sustainable Infrastructure Europe’, an overarching organization designed to support the development of sustainable infrastructure projects across all member states. The entity would be designed to accelerate the development of high quality infrastructure projects that meet investor demands and deliver the EU’s sustainable objectives, including its obligations under the Paris Agreement.

7.    Governance and leadership

The HLEG recommends to update ‘fit and proper’ tests to include an assessment of the individual and collective ability of the members of governing bodies in financial institutions to address sustainability risks. The HLEG recommends to extend the Stewardship Principles for institutional investors and strengthen director duties related to sustainability.

8.    Include sustainability in the supervisory mandate of the ESAs

The HLEG recommends to clarify how ESAs are expected to interpret the inclusion of sustainability in their mandate, to update the single rulebook accordingly and extend the horizon of risk monitoring to include climate-related and other long-term risks.

 

Other recommendations include tackling short-termism, empower citizens to engage with sustainable finance and greater transparency on indices and benchmarks as well as reflect on a ‘Think Sustainability First’ Principle.

Building on these recommendations, the EU Commission will now come forward with an action plan on sustainable finance. The findings of the report and the Commission's Action Plan will be discussed at a high-level conference on 22 March 2018 in Brussels.

Read the full HLEG report here