European Commission consults on a renewed sustainable finance strategy

What’s new?

On 8 April 2020, the European Commission (the Commission) published a Consultation on the renewed sustainable finance strategy, (the CP). The consultation period closes on 15 July 2020.

What’s the background to the consultation paper?

The CP is the latest in a series of Commission ESG-related documents, and follows on from:

• the Action Plan: Financing Sustainable Growth (March 2018), which
  contains a number of objectives and key actions needed to promote a
  re-orientation of private capital flows towards sustainable
  investments;
• the European Green Deal (December 2019) - this sets out a new
  growth strategy for the EU which would decouple economic growth from
  natural resources and create a more modern, more
  resource-efficient, and more competitive European economy; and
• a Sustainable Europe Investment Plan (January 2020) intended to
  support the Green Deal by mobilising at least €1 trillion of
  sustainability-related investments over the next decade through the
  EU budget and other sources.

Why is the Commission consulting?

The CP will inform the Commission in its development of a Renewed Sustainable Finance Strategy and seeks views from industry and other stakeholders on three main themes:

• how the financial sector and the economy can become more sustainable;
• how to increase opportunities for citizens, financial institutions
  and corporates to enhance sustainability; and
• how to reduce and manage climate and environmental risks.

What happens next?

The consultation period closes on 15 July 2020 and the responses to it will help develop the Commission’s final strategy, which it intends to publish in Q3 2020.

What else does the CP tell us?

Although the CP itself is a high level document, its contents give an insight into some of the Commission’s views and aims on certain aspects of sustainable finance.

Of particular note, the consultation makes the following points:

The role of asset managers

Rightly or wrongly, the Commission is of the view that the integration of material sustainability factors in portfolios (both in how they are selected and how they are managed), has traditionally “considered only their impact on the financial position and future earning capacity of a portfolio's holdings”.

The Commission considers that asset managers should also take into account how a portfolio impacts on society and the environment – the so-called “double materiality” perspective.

This aim is at the heart of the Disclosures Regulation, making it clear that a significant part of the financial services market must consider also their adverse impacts on sustainability.

In the CP, the Commission asks whether asset managers see merit in adapting rules on fiduciary duties, best interests of investors, risk management and internal structures and processes so they are directly required to consider and integrate adverse impacts of investment decisions on sustainability (and, if so, what solutions they would put forward).

EU Green Bond Standard

In its work to establish an EU Green Bond Standard (EU GBS), the Commission notes that it is committed to specifying the content of the prospectus for green bond issuances so potential investors are provided with additional information, within the framework of the Prospectus Regulation.

In June 2019, the Commission’s Technical Expert Group on Sustainable Finance (TEG) published its report, Proposal for an EU Green Bond Standard, which listed 10 recommendations for how to create an EU GBS – this proposal was updated with a usability guide in March 2020.

The aim of the EU GBS is to address several barriers in the current market, including:

• reducing uncertainty as to what is green by linking it with the EU
  Taxonomy;
• standardising costly and complex verification and reporting processes;
  and
• having an official standard to which certain financial incentives
  can be attached.

The TEG has recommended that, in the long term, oversight and regulatory supervision of external review providers should be organised by ESMA. While the necessary legislation is passed to permit this, though, the TEG suggests a market-based, voluntary interim registration process for verifiers of EU Green Bonds for a transition period of up to three years.

Green securitisation

Securitisation (a technique for converting illiquid assets into tradeable securities) allows banks to free up capital for new lending by raising fresh cash and moving credit risk out of their balance sheets. It also facilitates access to a greater range of investors. The CP underlines the Commission’s view that green securitisations could play an important role in financing the transition to a more sustainable economy.

The use of sustainable finance tools and frameworks by public authorities

The Commission recognises that some sustainable finance concepts that are generally applied to private finance could also be considered for the public sector and is committed to exploring how the EU Taxonomy can be used by the public sector in the context of the Green Deal.

The InvestEU programme, which is part of the EU’s Financial Framework for 2021 – 2027, combines public and private funding and, once the taxonomy is in place will “serve as a test case for its application in public sector-related spending”.

Promoting sustainable finance globally

Since the challenge posed by climate change and environmental degradation is a global one, the response needs to be internationally coordinated. As a result, the EU has, with others, launched the International Platform on Sustainable Finance (IPSF), the purpose of which is to promote integrated markets for environmentally sustainable investment at a global level and deepen international coordination on approaches and initiatives that private investors need if they are to take advantage of environmentally sustainable investment opportunities globally.