A taxonomy should be developed to define areas where capital is most needed to help promote sustainability in the European Union, recommends a group of pension funds and other investors.
The EU High-Level Expert Group on Sustainable Finance was established by the European Commission to advise on how to steer capital toward sustainable investments; to identify steps that financial institutions and supervisors should take to protect the financial system from sustainability risks; and advise on how to deploy these policies on a pan-European scale.
"Improving the contribution of the financial system to sustainable and inclusive growth requires a comprehensive review, the identification of areas where changes are needed, and the development of specific recommendations in these areas," said a final report by the group.
HLEG recommended a number of priority actions including the establishment of an EU sustainability taxonomy to identify where investments are most needed. This would start with climate mitigation, said the report.
The group also said the commission should clarify that fiduciary duties of institutional investors and money managers explicitly integrate material environmental, social and governance factors and long-term sustainability.
Disclosures should be upgraded by the commission to make sustainability opportunities and risks transparent; and official European sustainability standards for certain financial assets — beginning with green bonds — should be developed, the report said.
The group also recommended that a "Sustainable Infrastructure Europe" facility should be launched as a priority, to expand the size and quality of the EU pipeline of sustainable assets. Further details were not provided. The final priority recommendation is to integrate sustainability "firmly in the governance of financial institutions as well as in financial supervision."
The group also made a number of other recommendations, advising the EU to confront short-termism in financial markets; to monitor investment plans and delivery through a dedicated EU "observatory on sustainable finance"; to improve financial market benchmark transparency and guidance; to ensure EU accounting rules do not unduly discourage long-term investment; to establish a "think sustainability first" principle in EU policymaking; and to "drive sustainable finance at the global level."
Finally, a number of recommendations were also made for specific parts of the financial system. Insurance companies should have a stronger role in equity, long-term and infrastructure investments. Money managers, pension funds and investment consultants should work to understand the sustainability preferences of their participants and clients; and credit-rating agencies should lengthen the time horizon of risk analysis and disclose how they take ESG factors into consideration.
The recommendations "aim to inspire and guide the (European Commission's) action plan on sustainable finance. The art of implementation will be to not increase the overall regulatory burden and complexity, given that the ultimate purpose is to facilitate more investment," said the report.
Members of the group include Claudia Kruse, managing director governance and sustainability at APG Asset Management; and Steve Waygood, chief responsible investment officer at Aviva Investors.