The European Commission has been accused of sidelining social and governance considerations in its proposed action plan for sustainable finance as it focuses on reducing carbon emissions in line with the Paris Agreement.
A narrow definition of ESG focussed around environmental factors would have worrying implications for advisers, the Investment Association has said in its submission to the European Commission’s Sustainable Finance Action Plan proposals. Its concerns were specifically in response to the part of the plan focussed on taxonomy, which aims to define what is sustainable and identify areas where sustainable investment can make the biggest impact.
The IA has called for the Commission to spell out its focus on the environment or risk narrowing the definition of ESG.
The submission stated: “In the context of the provision of financial advice, if a client indicates that they would like ESG considerations to be taken into account, this does not necessarily mean that they wish to direct capital flows towards particular environmentally sustainable investments. Instead, they may in fact wish that any relevant ESG factors (including any financial risks stemming from climate change, resource depletion, environmental degradation and social issues) are incorporated into investment decision-making.”
Sustainable finance plan’s Mifid suitability implications
The IA said it was “very worrying” that European Commission was planning to reference the action plan’s narrow definition of ESG in changes to suitability requirements within Mifid II. It said investors may end up in funds that do not reflect their investment objectives.
The interim report for the European Commission Sustainable Finance Action Plan was published in March. It aims to reorient capital flows towards sustainable investment, foster transparency and long-termism, and manage financial risks stemming from climate change, environmental degradation and social issues. Europe needs €180bn of additional investments a year to achieve its 2030 targets, the Commission has said.
IA director of investment and capital markets Galina Dimitrova said the industry body wants to help savers achieve environmental and social as well as financial goals. “As the European Commission’s package of proposals is both comprehensive and far-reaching, it is vital that these initiatives work harmoniously together and do not have the unintended consequence of putting a brake on existing economic activities that already contribute to a more sustainable economy,” Dimitrova said.
Human rights missing from the European Commission plan
Other industry groups have also raised concerns the European Commission’s definition of ESG was too narrowly focused.
In July, Shareaction led a call for the Sustainable Finance Action plan to increase its focus on human rights. The group called for the Commission to appoint human rights experts to the high-level working group leading the sustainable finance action plan and to refer to human rights legislation, such as the EU Charter for Fundamental Rights.
The pressure group wrote to a number of EU leaders, including Jean-Claude Juncker and Valdis Dombrovskis (pictured), to say the Commission had failed to properly consider the negative effects some climate mitigation activities could have on communities, pointing to the negative effects biofuel projects have had on food security, gender equality and women’s rights for example.
More than a dozen organisations supported Shareaction’s letter including the European Coalition for Corporate Justice, the International Federation for Human Rights and Global Witness.
Key features of the sustainable finance action plan
- Taxonomy – An EU classification system aimed at establishing a common language for sustainable finance.
- EU labels – For green financial products to help investors identify investments that comply with green or low-carbon criteria.
- Duty of asset managers and institutional investors – Clarifies disclosure requirements and how sustainability should be taken into account in the investment process.
- Requiring insurance and investment firms to advise clients on the basis of their preferences on sustainability.
- Sustainability in prudential requirements – The Commission is exploring the feasibility of recalibrating capital requirements for banks for sustainable investments, when it is justified from a risk perspective.
- Corporate reporting – Aligns existing disclosure requirements them with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), which has been headed by Bank of England governor Mark Carney.
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