The release of this report is highly significant, because it is certainly the most comprehensive and ambitious action plan in the world that has been published on sustainable finance so far. The recommendations that have just been delivered to the Commission revolve around several axes, with eight transversal recommendations identified as the most urgent and operational, and twenty other recommendations intended to consolidate our ambition in the long term. All of them are important, since we put forward a global approach of transformation of the financial system in the service of a more sustainable and inclusive society. I would like to detail, however, three of these recommendations, which illustrate the spirit of our report and which, in my view, can help to change the situation rapidly.
A keystone: the European taxonomy of sustainable assets
The first recommendation, the keystone of many other proposals, is the development of a taxonomy of sustainable assets at the European level. Its objective is to answer the recurring question “in which sectors should we invest to finance the transition? “, and to respond to the risk of greenwashing by defining the notion of an asset favouring sustainable development. We expect the European Commission to first define the sustainable assets in the area of climate mitigation. In a second step, this taxonomy should be extended to other environmental and social aspects. It is essential for Europe to agree on this classification. China, for example, has already enacted its own taxonomy.
This taxonomy will contribute to the creation of standards and labels for sustainable finance products. This will be the case for green bonds, but also for investment funds intended for the general public. The report clearly recommends it. This could pave the way to imagine at a later stage standards for bank loans, or the definition of the “green” part of the activity of a listed company, and therefore green market indices that comply with this taxonomy.
Involving citizens and end investors
This evolution is even more important since the labelling systems are of great interest to citizens who are also savers. A green label will help them target investment products in favour of the energy and ecological transition. There is a real expectation from citizens and civil society, which is regularly demonstrated by opinion studies. The creation of demanding labels is a way of not disappointing them.
The recommendation of the report that is the most important to me is therefore the one concerning savers, the “retail package”, which proposes a set of measures intended for the mobilisation of citizens. First, we propose that retail investors to be systematically consulted by their investment advisor about their sustainability preference, and not only about their risk preferences, as currently required by the MiFID Directive. Second, it will be necessary to provide more complete and accurate information to enable savers to better choose their investments. The so-called “responsible” products (ISR, ESG, green, etc.) are very numerous today on the market, but when citizens have access to them, they cannot always check neither the ingredients nor the recipe. We recommend that only products meeting minimum quality criteria to be qualified as responsible. The French Financial Market Authority (AMF) has favoured such development in its latest report on SRI. Finally, we support the creation of an eco-label for financial products intended to the general public, as has been done in France with the TEEC label (Energy Transition and Ecological).
A third key aspect of the report is stakeholder accountability and transparency. The HLEG recommends integrating the consideration of environmental and social issues into the obligations of investors. In other words, to make investors responsible for their impacts.
On the issue of transparency, we have relied on existing work and regulations. First, the recommendations of the TCFD (Task Force on Climate Disclosure), which published its final report in July. The TCFD recommends the publication of a climate reporting and sets an extremely precise framework on the reference documents that companies should provide (governance, strategy, risk management and indicators used). Nonetheless, this communication remains voluntary. Conversely, in France, the article 173 of the Ecological and Energetic Transition law requires institutional investors to communicate how they integrate climate-related risks. Lastly, the Non-Financial Reporting Directive (NFR) applicable since January 1, 2017, applies to public and private companies in the 28 EU Member States. A review of this directive is scheduled for the end of 2018: this is an opportunity to give the EU a more appropriate transparency regime. Our recommendation is to build upon these existing blocks in order to attain a level of transparency that is commensurate with the information needs of the financial system regarding the transition. We therefore suggest, on the one hand, extending to the European level the experience of Article 173 for financial institutions, and on the other hand, encouraging the voluntary implementation of TCFD recommendations by non-financial companies, before making them mandatory by 2020. We want to be both pragmatic and ambitious.
A green supporting factor ?
The report did not put an end to all the debates. The “green supporting factor”, initially proposed by the French Banking Federation (FBF) and taken over by the European Parliament, consists in reducing the capital requirement of banks for the financing of the energy transition. This idea is explicitly mentioned in the report, but we have not reached a consensus. Some members consider that prudential regulation should remain exclusively dependent on the risks taken by banks and that there is no evidence at this stage that green assets are less risky than others. Others consider that the risk induced by non-durable assets should be penalised as a priority before removing the constraint of banks. Others finally consider that both options should be examined.
I personally supported the introduction of a Green Supporting Factor that would send a strong message to the banks, which are the main financiers of the European economy. In my opinion, it seems difficult to state that climate change induces systemic risks for the financial markets while omitting to take them into account in banking regulation. European Commissioner Valdis Dombroski has declared himself in favour of applying such a mechanism. It is now up to European political leaders to decide.
Towards an ambitious action plan at the European... and French level
The Commission has already announced that it will present an action plan for sustainable finance in March 2018. This goes far beyond what we expected when the work of the HLEG started, and here we must salute the courage of the Commission to take stock and action very rapidly, despite a particularly constrained calendar and political and institutional context. We hope that the Commission will not only repeat a few emblematic measures, but rather that our work will lead to a deep change in the vision of the role of finance.
This underlying trend must obviously be relayed at the level of Member States. In France, the Ducret-Lemmet report, published in December, which fuelled the first announcements of the Minister of the Economy during the Climate Finance Day, is a chance. It poses the foundations of a renewed financial system. The Paris marketplace has a real know-how and a very rich ecosystem in green finance. Several of the HLEG report’s recommendations are based on French examples. We must remain at the forefront and continue what has been started in recent years. Building a niche will not be enough: green and sustainable finance should be put at the heart of the strategy in order to strengthen the Paris marketplace, and become its guiding principle, before being the one of the financial sector in Europe.
Written on 31 January 2018