Sustainability still on the agenda despite COVID-19: Commission consults on broad and ambitious Renewed EU Sustainable Finance Strategy

Sustainability more important than ever in light of health crisis, says the European Commission

In Europe, there were concerns that environmental and social sustainability would be side-lined given the global focus on the COVID-19 pandemic. Some voices argued that funding the recovery should take precedence over any other priorities. However, it is looking increasingly plausible that the pandemic will in fact increase focus on sustainability.

The European Commission last week launched a consultation on its Renewed Sustainable Finance Strategy, which builds on the EU’s 2018 Action Plan on Financing Sustainable Growth. This is a strong message coming from the European Union’s executive arm at a time where many were wondering whether it would keep pushing forward its flagship policy initiative, the EU Green Deal, which was unveiled in December and announced the renewed strategy.

With the launch of the consultation, the Commission not only sent a very clear signal that it intends to maintain its commitment to the sustainability agenda, but it also made the link between the current pandemic and climate change, therefore encouraging a green recovery and transition. The Commission notes that many recent disease outbreaks can be linked to illegal trade in endangered animals and that degraded habitats, when coupled with a warming climate, may encourage higher risks of disease transmission and contribute to more global health emergencies in the future.

It is therefore good to bear in mind that even if the policy plans of the von der Leyen Commission currently have been blown off course by COVID-19, the Commission will now likely regroup around a reinvigorated green agenda - and then it still has 4 years out of its 5-year term to make any new legislative plans a reality.

What is the renewed strategy about?

Recognising that significant investment will be needed in the next 5 to 10 years and that, despite many recent initiatives, “the financial system as a whole is not yet transitioning fast enough”, the renewed strategy is intended to be more comprehensive and ambitious than the 2018 Action Plan. It will focus on three key areas:

1. Encouraging long-term sustainable business. Creating a framework of tools and structures which enables sustainable finance and encourages business to invest in long-term development, rather than short-term financial performance.

2. Increasing opportunities for impact. Increasing opportunities for citizens, financial institutions and corporates to have a positive impact on sustainability.

3. Managing risks. The integration and management of climate and environmental risks within the financial system, while ensuring social risks are duly taken into account where relevant.

Taking the form of a questionnaire running to over 100 questions, the scope of the consultation is both broad and detailed. It seeks input ranging from specific technical points to requests for policy suggestions. The consultation is relevant to the entire financial system, including banks, pension funds, insurers, asset managers, credit rating agencies and investment advisors. Contributions are invited from all stakeholders, including a set of questions addressed at citizens, as well as a more extensive set aimed at experts.

Motivated by “the urgency with which we need to act to tackle the climate and environmental-related challenges”, nothing seems to be off the table. The consultation seeks views on actions in areas ranging from corporate governance and fiduciary duty, to prudential capital requirements, public subsidies and even integrating “sustainable finance as part of existing subjects in citizens’ education at school”.

There is a continued focus on the importance of access for consumers and the market to high-quality, comparable data via disclosure requirements based around the EU Taxonomy. Feedback is sought on a number on initiatives currently under development, including the Climate Benchmark Regulation and Green Bond Standard, but the questions also explore a wide variety of potentially far-reaching interventions. Among a myriad of other matters, the consultation seeks views on:

- requiring financial advisers to offer “sustainable investment products as a default option”;

- regulation of “portfolio turn-over ratios and holdings periods for institutional investors” to encourage “longer-term perspectives among financial institutions”;

- adaptation of fiduciary duties and best interests obligations for asset managers, “to directly require them to consider and integrate adverse impacts of investment decisions on sustainability (negative externalities)”;

- whether institutional investors and credit institutions should be “required to estimate and disclose which temperature scenario their portfolios are financing (e.g. 2°C, 3°C, 4°C), in comparison with the goals of the Paris Agreement”;

- a “dedicated regulatory and prudential framework for ‘green securitisation’”;

- whether there are “assets that could warrant a more risk-sensitive treatment” in banks’ prudential capital requirements, in order to “incorporate ESG risks into prudential regulation in a more effective and faster manner”;

- requiring “corporates and financial institutions […] to communicate if and explain how their business strategies and targets contribute to reaching the goals of the Paris Agreement”;

- whether directors’ remuneration should be subject to “a mandatory share of variable remuneration linked to non-financial performance”, such as “carbon emission reductions”; and

- what kinds of “public financial incentives” could help with “the scaling up of sustainable finance”.

The consultation is open until 15 July 2020. It will be relevant to anyone with an interest in sustainability, climate change and the future of business.

Next steps

The Commission will take a few months to take stock of the consultation contributions received, which will help it to finalise the renewed strategy. The Commission is currently expected to unveil a Communication on the renewed strategy in the third quarter of 2020. The Communication will be non-legislative but may include a number of policy initiatives to be rolled out over the next months and years.

In a revised work programme to be published on 29 April, the Commission is expected to confirm that it intends to keep to its current timetable as the renewed strategy will be essential in re-orienting private capital flows towards a sustainable recovery.

The co-legislators, i.e. the European Parliament and Council (composed of the 27 EU Member States) will need to approve any legislative proposals put forward by the Commission. They will likely adopt positions on the final strategy (respectively in the form of a “resolution” and “conclusions”), in which they may raise any concerns and reservations they may have, but will no doubt throw support behind the Commission’s drive on sustainable finance.