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Investors, managers given role to play in Europe’s future sustainable finance system

Institutional investors and money managers have an enhanced role to play in European sustainable finance under a new action plan by the European Commission.

The EC unveiled Thursday its strategy for achieving a financial system that supports the European Union's climate and sustainable development agenda. Institutional investors and money managers feature in the key calls to action by the commission, which wants to clarify the duty of investors to "take sustainability into account in the investment process and enhance disclosure requirements."

The commission also wants insurance and investment firms to advise their clients on the basis of their sustainability preferences and to create EU labels for green financial strategies on the basis of a new classification system of taxonomy for sustainability. It will also enhance transparency in corporate reporting. For this last part of the plan, the commission proposes a revision to guidelines on existing non-financial information, further aligning them with recommendations by the Financial Stability Board's task force on climate-related financial disclosures.

The action plan forms part of efforts by the Capital Markets Union initiative to connect finance with the specific needs of the European economy. It also follows recommendations set out by a commission-appointed High-Level Expert Group on Sustainable Finance, made up of institutional investors and other representatives of Europe's financial markets.

The European Commission said around €180 billion ($222 billion) in additional investments are needed per year to achieve sustainability targets agreed in 2015, including a 40% cut in greenhouse gas emissions in the region.

The commission has also launched a call for applications for a "technical expert group on sustainable finance." In May, it will put forward proposals on the duties of institutional investors and money managers regarding sustainability, as well as principles and scope for an EU taxonomy for climate change and other environmental and social activities. Following that, in the second quarter, the commission will amend two directives — the Markets in Financial Instruments Directive and the Insurance Distribution Directive — to enhance sustainability in suitability assessment, it said.

In 2019, reports will be published on a taxonomy on climate change activities and another on green bond standards.

The action plan was welcomed by associations representing parts of the money management and sustainable finance industries.

"ESG integration and supportive policy environments must go hand in hand," said Nathan Fabian, director of policy and research at the Principles for Responsible Investment, in an emailed comment. "It is time for a comprehensive and far-sighted response from policymakers and that is what the commission appears to be delivering." The PRI is working to address key blockages and areas to enable responsible investment.

In a separate emailed comment, Invest Europe, which represents Europe's private equity, venture capital and infrastructure sectors, as well as their investors, acknowledged a role for private equity in supporting the sustainable finance plan. However, it said any further measures should take the diversity of the industry into account.

"The EU's goal of transitioning to a sustainable economy is important and private equity is well-positioned to support it," said Michael Collins, CEO of Invest Europe, in the comment. "In order to create a truly sustainable finance landscape, the commission's plan needs to reflect the industry's diversity and take a pragmatic approach."

He added that private equity investors and money managers vary in size and have different investment models, so any legislation around their duties relating to sustainable finance "needs to leave sufficient flexibility on how to implement sustainable finance procedures in practice."

The European Fund and Asset Management Association also welcomed the action plan but said it disagrees with statements regarding money managers "not systematically considering sustainability in the investment process."

The association, which represents money managers in Europe, said in a comment that evidence suggests integration of these factors has increased over recent years and that "asset managers play a pivotal role in supporting sustainable economic growth and long-term financing of the European economy."

EFAMA said an EU agenda should focus on a market-driven approach and "avoid creating any unintended barriers to market development," which is crucial given the constant evolution of strategies, practices and demands from end-investors. A particular concern relates to a legislative initiative to integrate sustainability considerations in the duties of institutional investors and money managers.