A review of prudential regulation for institutional investors and a requirement for money managers to disclose how they integrate environmental, social and governance factors into their strategy should be considered as ways of financing a sustainable European economy, says a European Commission-appointed group.
The high-level expert group was appointed by the commission last year, to ensure its approach to sustainable finance "is ambitious and at the forefront of innovation," said the report published Thursday. The group has recommended reforming the European Union's rules and financial policies in order to facilitate green and sustainable investment.
Among its recommendations is to review prudential legislation affecting insurance companies and pension funds. The report suggested exploring the adjustment of Solvency II rules, which place capital requirements on insurance companies, "to enable greater investment … in sustainable equity and long-term assets."
For money managers, which the group identified as "uniquely placed to help capital flow towards more sustainable investments," embedding sustainability into stewardship codes and money management agreements should be considered. It added that "requiring asset managers to disclose how they integrate ESG factors into their strategy and vote on ESG issues, are all part of the measures that could be pursued to strengthen the ownership chain."
Credit rating agencies and stock exchanges can also do more. "It is time for long-term sustainability risks and opportunities to move from an add-on consideration to a built-in feature in ratings," the report said. While acknowledging that EU stock exchanges are "global leaders when it comes to disclosure of ESG factors, much more can be done to promote sustainability." The group said exchanges could "also support the integrity and growth of the green bond market by encouraging the development and application of robust standards."
The group will continue to explore these and other policy areas.
The group made a number of other early recommendations, including the introduction of an official European green bonds standard for green asset classes, as well as labels for sustainable and responsible investing and sustainable strategies.
The group is seeking comments, questions and discussions following its interim report, with the aim of publishing its final report in December.
The interim report on sustainable finance is available on the European Commission's website.