The HLEG. Europe’s Call to Arms for Sustainable Finance

European Authorities are taking sustainable policy seriously.

The High Level Expert Group (HLEG) on Sustainable Finance made its final recommendations to the European Commission (EC) in its landmark report Financing a Sustainable European Economy, published in January 2018. In response to HLEG, the EC published its Action Plan: Financing Sustainable Growth on 8 March and its first legislative proposals on 24 May.

The HLEG report contains 24 separate (but interlinked) recommendations that cover nearly every aspect of the financial system. Its vision is broad, identifying sustainable finance as a core strategy for the EU if it is to achieve its goals of prosperity and environmental regeneration.

All of the recommendations have a major potential impact on the success of sustainable finance but three in particular struck me as interesting.

If Europe is to successfully promote sustainable finance, it needs to have a common language. The report therefore calls for a sustainability ‘taxonomy’ (classification system), applicable for all types of assets and capital allocation. This common language will serve as the foundation for the sustainable finance initiative. The EC has said that it will put forward a legislative proposal on the governance of this classification system in the spring.

Data remains a huge barrier and so HLEG recommends upgrading disclosure rules to make sustainability risks fully transparent, starting with climate change. This includes specific proposals for implementing the recommendations of the FSB’s Task Force on Climate-related Financial Disclosure (TCFD) – essentially an EU-climate disclosure regime that is compliant with the TCFD recommendations.

The report recommends clarification on the investor duties of asset owners, investment intermediaries and financial advisers, so that these can meet the needs of their clients. This is recognised as requiring the amendment of multiple EU directives that link investor duties to the investment horizon of an individual or institution (including but not limited to IORP II, MiFID II and Solvency II, as well as UCITS, AIFMD and the Shareholder Rights Directive).

The EC’s Action Plan outlines the proposed legislative response in support of sustainable finance. On the taxonomy, it confirmed that ‘the aim is to embed the future EU sustainability taxonomy in EU law”. In terms of investor duties, the EC intends to clarify institutional investors’ and asset managers’ duties in relation to sustainability. The EC’s first legislative proposals cover both these areas and low-carbon benchmarks and better advice to clients on sustainability. As a next step, the European Parliament and Council will review and agree on the proposals. Enabling legislation is scheduled to be adopted from late 2019.

About HLEG

Established in December 2016, HLEG’s goal is to provide a sustainable finance roadmap containing practical policy recommendations. More specifically, the HLEG delivered recommendations on:
    • How to integrate sustainability considerations more effectively into the EU’s financial policy framework
    • How to protect the stability of the financial system from risks related to the environment and its stability
    • How to mobilise capital, notably from private resources, to finance sustainable investments and growth 

  • The final report proposes:

    • A classification system, or ‘taxonomy’, to provide market clarity on what is ‘sustainable’
    • Clarifying the duties of investors’ when it comes to achieving a more sustainable financial system
    • Improving disclosure by financial institutions and companies on how sustainability is factored into their decision-making
    • An EU-wide label for green investment funds
    • Making sustainability part of the mandates of the European Supervisory Authorities (ESAs)
    • A European standard for green bonds

    At BNP Paribas, we believe that banks can and should support the move to sustainability and the transition to a green economy. We therefore continue to develop the sustainable finance solutions that support our clients and society to make this transition.