SUSTAINABILITY KNOWLEDGE CENTRE

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EPISODE 2

THE AUTHORITIES ARE TAKING CHARGE OF THE TOPIC

TOPICS OF THE EPISODE

THE UNITED NATIONS: DRIVER OF MAJOR SUSTAINABILITY INITIATIVES

The United Nations has been one of the main drivers of major sustainability and responsibility initiatives.

In 2000: the Global Compact makes businesses and governments aware of their responsibilities in terms of business ethics and the environment;

In 2006: the six Principles for Responsible Investment (PRI) aspire to govern the framework for more sustainable finance;

In 2015: the Sustainable Development Goals (SDGs) take over from the Millennium Development Goals and advocate the economic, social and environmental dimensions of sustainable development.

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THE EUROPEAN COMMISSION FOR MORE SUSTAINABLE FINANCE

In view of the various initiatives, mounting pressure from stakeholders and boom in sustainable and responsible investments, the European Commission aspires to give more sustainable finance a stronger position on the world map.

In May 2018, it released its Action Plan –which is based on various expert assessments and recommendations made between 2016 and 2017– together with several regulatory proposals.

The European Commission’s objective is clear: to accelerate the development of practices which involve integrating environmental, social and governance (ESG) factors into traditional finance and to drive the market for sustainable and responsible investments.

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ENVIRONMENT, TRANSPARENCY AND LONG-TERM: WHAT ARE THE EUROPEAN COMMISSION’S MAIN PROJECTS?

The Action Plan, which focuses on three key keywords –Environment, Transparency and Long-Term– is built on four major projects:

  1. Defining a taxonomy of sustainable and responsible finance: a reference framework for what is or is not sustainable, in order to clarify the situation for investors and other stakeholders in their decision-making processes;
  2. Integrating ESG factors as a fiduciary duty: the integration of risks but also opportunities associated with environmental, social and governance issues must be part of the management duty of asset managers, insurers, pension funds, financial consultants and private managers;
  3. A green label for sustainable finance: formal recognition at European level, in line with the requirements of the taxonomy defined;
  4. Adapted and specific benchmarks: harmonised minimum standards for low carbon indices (reducing the negative impact in terms of carbon emissions) and positive carbon impact indices (encouraging low carbon emission investments in line with the Paris Agreement)

 

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AN IMPACT ON MAJOR FINANCIAL SECTOR DIRECTIVES

The action plan also aims to amend several major directives applicable in the sector:

MiFID (financial markets) or IDD (insurance distribution): the European Commission should communicate its delegated acts in 2019, on the basis of the public consultation launched on the issue.

IRP (activities and supervision of institutions for occupational retirement provision): in its second version, the directive already provides for the integration of ESG factors and makes this a fiduciary duty for pension funds and their asset managers under the principle of standards of good prudence in the risk management process.

Solvency II (the taking-up and pursuit of the business of insurance and reinsurance): the European Commission also aims to review the financing and capital requirements of banks and insurance companies in light of environmental and climatic factors; as a result, it may amend the Solvency II Directive to include the potential impact of these factors on the funding ratios of banking and insurance operators.

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HOW CAN INSTITUTIONAL INVESTORS PREPARE FOR THE REGULATION BEING DEVELOPED?

The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) are a pragmatic approach to integrating ESG factors and in particular the potential risks and opportunities associated with climate change and other environmental factors.

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THE LAST WORD

European authorities have been working twice as hard over the last two years to make progress on their ambitious plan for more sustainable finances. Today, the Commission’s Action Plan is known and the first legislative measures have been taken. However, with European Parliament elections next May and the formation of a new commission at the end of 2019, the current president, Mr Juncker, is under a certain degree of pressure to finalise the plan.

Therefore, whether convinced of or sceptical about sustainable and responsible investment, it is, however, the integration of ESG factors as a fiduciary duty of all institutional investors that it must clearly respond to.

It is therefore better to prepare for the future regulation, as its objective of driving the sustainable and responsible investment market continues to be laudable. To this end, transparency and dialogue with the various stakeholders are keywords.

Integrating sustainability factors into management involves knowing the dimensions and the tools available. This will be on the agenda for our next episode: What are the dimensions and tools to be made available to report on the sustainability of your portfolio? To be continued…

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