Executive Summary
Announced in March 2018, the EU Sustainable Finance Action Plan supports the European Union’s efforts to meets its climate and energy commitments under the Paris climate agreement. These include cutting greenhouse gas emissions by a minimum of 40% compared to 1990 levels and increasing the share of renewables in final energy consumption to at least 32%, versus current levels of around 17%¹. The European Commission also seeks to encourage capital flows into areas that promote the United Nations’ Sustainable Development Goals as well as managing the financial risks from climate change.
The ten point Action Plan goes further by moving the topic of sustainability not just into the agenda of finance ministries and financial regulators, but, also into the core activities of financial institutions such as banks, pension funds, insurers, asset managers and private banks among others.
When it comes to the Action Plan, the main areas of activity in the weeks and months ahead will relate to:
- the development of an EU taxonomy
- the creation of an EU green bond standard
- establishing minimum standards for the methodology of the “low carbon” and “positive carbon impact” indices and minimum disclosure requirements in ESG integration in the methodology of benchmarks
- metrics allowing for improving disclosure on climate-related information
To support these tasks a 35-member Technical Expert Group on sustainable finance (TEG) has been established which will operate until June 2019 with a possible extension to the end of this year.
The aims of the TEG’s four working groups are multi-faceted, but, include delivering a robust classification and labelling system as to what can be viewed as sustainable investments and/or green finance.
Part of the aims of this classification system will be to enable a more accurate monitoring of capital flows into sustainable activities as well as to build trust and integrity into the emerging sustainable finance industry. Moreover, institutional investors and asset managers who claim to pursue sustainability objectives will have to disclose how their investments are aligned with those objectives.
The Action Plan will also help to deliver greater clarity on investors’ duties as it relates to ESG. This will drive efforts to integrate ESG factors into the investment process. One of the aims of incorporating sustainability into investment advice and meeting clients’ preferences will be to build a more liquid pool of sustainable investment products.
In this paper, we examine why the EU Action Plan was developed, what are its next steps and how this will likely impact financial market players. We also take a deep dive into the four working groups of TEG and how the asset management community can respond.
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