EU Action Plan on Sustainable Economy
More than half a year ago (on 8. 3. 2018), the EU Commission presented an action plan. The basis for "Financing Sustainable Growth" is showing the first small fruits. Not least because the EU experts now want to adjust their longer-term target horizon to take account of climate change, the energy transition and social factors.
The EU action plan aims to gear the European financial sector more strongly to financing longer-term, sustainable growth. This requires far-reaching measures, including legislative ones, in terms of reporting, accounting, regulation and corporate governance.
The action plan presented at the beginning of March 2018 is based on the final report of a high-level expert group on sustainable finance (HLEG) presented in January, whose recommendations were largely adopted. For a few weeks now, there has been a significant increase in interest.
Proposals of the expert group
Far-reaching measures, including legislative ones, are needed to implement the proposals, including accounting, corporate governance, risk management and regulatory steps. In particular, the time horizon for accounting and the recognition of risks must be significantly extended in order to adequately reflect the effects of climate change and the energy transition, for example.
The action plan in brief:
The following is an attempt to summarize the EU Commission's plan, outlined on twenty pages, in brief and with regard to its practical implications for the banking industry:
- Classification of economic activities in terms of their contribution to sustainable development ("taxonomy").
The main criteria to be applied are climate change, environmental impacts and social impacts. Initially, climate change and the energy transition will be the focus of a technical expert group
- Standards/seals of approval for "green" financial products
Initially, the Commission aims to standardize "green" bonds, so-called greenbonds. Later, other products are to be tested on the basis of the taxonomy
- Promotion of investments in sustainable projects
Building advisory capacity for sustainable infrastructure projects in the EU and neighboring countries.
- Inclusion of sustainability in financial consulting
Modification of the distribution directives for banks (MiFID II) and insurance companies (IDD, Insurance Distribution Delegated Acts). Note: These points were not so clearly included in the expert recommendation
- Quality benchmarks for sustainability
Creation of more transparency and comparability of sustainability criteria
- Better integration of sustainability in ratings and market research
Relevance for credit rating and methodology of sustainability ratings
- Clarification of the obligations of investors and asset managers
The expert report clearly called for a "fiduciary duty" of investors for future generations. However, this is hardly anchored in constitutional law, e.g. corresponding sustainability requirements are missing in the German Basic Law
- Consideration of sustainability criteria in risk management and regulation
The first step will focus primarily on climate risks and the energy transition. Specifically, this is the implementation of the proposals of the Task Force for Climate-related Financial Disclosures (TCFD) set up by the Financial Stability Board.
Some supervisory authorities, such as the German Bundesbank, have explicitly called for this, and the Dutch central bank has already announced a stress test for climate risks at banks
- Expansion of reporting and accounting obligations
Far-reaching adjustments are required here with regard to materiality in reporting and, above all, to the time horizon or reference to the future.
- Strengthening sustainability aspects in corporate management and capital market communications
Company managements are to be obliged to formulate and publish sustainability strategies. According to the ideas of the action plan, the pressure of the capital markets to act in the short term in companies could be reduced, among other things, by holding periods and turnover limits for asset managers.
Provided that the European Parliament follows the action plan, the measures may take effect within a few months, for example through adjustments to MiFID II (banks) and IDD (insurance sales) regulatives. It was to be expected that the EU Commission would take action in this direction, but parts of the banking industry will probably be surprised at how quickly and far-reaching the interventions can be.
More details on the interpretations of the EU Action Plan can be found at here (in English) or also here
