The sustainability context in the European Union
Many social, environmental and societal challenges face the European Union today. Acknowledging them, the European Union committed to several international initiatives, among them the Paris Agreement on climate change in 2015 (COP21) and the UN Sustainable Development Goals (SDGs). Internally, the EU Commission also took several steps towards sustainability, notably with the release of the European 2030 Agenda for sustainable change in 2015, and the Capital Markets Union initiative.
The HLEG mandate
Following that vein, the European Commission created the High Level Expert Group (HLEG) on Sustainable Finance in October 2016 to make policy recommendations to the EU Commission to develop an EU strategy on sustainable finance. The mandate is two-fold: enabling and galvanizing the flow of public and private capital towards sustainable investments while protecting the stability of the EU financial system. Recommended policy tools can span obligations, incentives or signals. In addition, the Commission tasked the HLEG to look at green financial assets, to include public finance instruments and development banks, and to consider retail investors and smaller projects and capital raisers.
Figure 1: Summary of the HLEG mandate (Source: HLEG Presentation – April 12th, 2017)
After a call for applications that received more than 100 candidates in a month, 20 senior experts formed the HLEG in December 2016. Carefully selected for the constituent they represent and their expertise, the HLEG members span civil society, finance industry and academia. They are asset managers, insurers, banks, exchanges, non-governmental organizations, academics, and think-tanks. Observers include European institutions as well as the UNPRI and UNEP.
HLEG Operations and intermediate wins
The HLEG started working in January 2017 and held monthly meetings. The first 6-month phase involved identifying and assessing key policy areas, which would be summarized in an interim report. The methodology included a rather exhaustive review of existing EU legislation.
Closely integrated with the rest of the European institutions, the HLEG released a statement in June 2017 on the Capital Markets Union mid-term review. The HLEG also worked pretty closely with the G20 Green Finance Study Group, Financial Stability Board’s Task Force on Climate-related Disclosures.
Since the beginning, one of the HLEG greatest contributions was not only to build a strategy on sustainable finance but also to advocate for, more broadly, integrating sustainability in EU financial policy, through a “sustainability test” for all future proposals. Several of the early ideas mentioned by the HLEG were incorporated in existing directives and European measures under review. MiFIDII (the second Markets in Financial Instruments Directive) requires asset managers and investment advisors to integrate ESG considerations when they communicate to clients. Similar requirements with insurance distributors when they communicate to clients after the Insurance Distribution Directive. Finally, the guidelines on non-financial reporting, adopted by the EU Commission in June 2017, also included ESG reporting.
HLEG Interim Report and intermediate wins
In July 2017, the HLEG released its interim report, which highlighted eight early recommendations and 12 policy areas for further discussion. The eight early recommendations are:
- developing a classification system for sustainable assets
- establishing EU standards and label for green bonds and sustainable funds and other assets
- clarifying that fiduciary duty encompasses sustainability
- strengthening ESG reporting requirements
- introducing a “sustainability test” for EU financial legislation
- creating “sustainable Infrastructure Europe” to channel finance into sustainable projects
- enhancing the role of European supervisory agencies (ESAs) in assessing ESG-related risks
- unlocking investment in energy efficiency through accounting rules
Remarkable by the breadth of its recommendations, spanning supervisory agencies to infrastructure, the report was able to question some of the underpinnings of the financial system (fiduciary duty, benchmarks, accounting standards, etc.).
In an effort to include the public and legitimize its recommendations, the HLEG opened a public consultation, geared mostly towards institutional investors and asset managers. One-hundred and ninety-one responses were collected and some made publicly available on the EU Commission’s website.
The HLEG Final Report
In January 2018, the HLEG released its final report. Its eight key recommendations drew from the interim report and their avenues to implementation were further detailed.
Six major inputs were further included on the EU strategy and action plan:
- The definition of a Taxonomy for sustainable assets
- The inclusion of sustainability and ESG Duties of investors
- The disclosure of ESG metrics
- EU label for green investment funds
- EU standard for green bonds
- Sustainability as part of the mandates of European Supervisory Authorities
Next steps towards an EU Sustainable Finance strategy
After the release of the final report, the EU Commission released its Action Plan on Sustainable Finance in February 2018, followed by the creation of a Technical Expert Group (TEG) to advise the EU Commission on the implementation of the action plan. Composed of 35 members, the TEG will work from July 2018 to June 2019 to implement the EU action plan. This group works in plenaries and sub-group meetings and plans several public consultations.
Conclusion: Assessing the impact of the HLEG on EU sustainable finance policy
Legitimate criticism about the HLEG argued that its recommendations were geared more towards the “environmental” than the “social” and it did not take enough into consideration retail investors and small players in the finance industry. Though the HLEG provided promising ideas questioning the underpinnings of any financial system (accounting, benchmarks, taxonomy, fiduciary duty) the overall outcomes will take longer to assess. While the EU committed to an Action Plan in 2015 and formalized it, thanks to the help of the HLEG, at the end of 2018, implementation still has to happen and another committee, the Technical Expert Group has been appointed to help the Commission.