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European Commission prepares legislative proposals for sustainable finance

The European Commission (EC) is preparing a strategy on sustainable finance based on the recommendations of the European Union’s High-Level Expert Group (HLEG) on sustainable finance. The strategy, expected to be released in March, will trigger several legislative proposals.

The HLEG was appointed a year ago to assess the financial system and see where changes are needed to support the transition to the low-carbon economy, in line with the EU’s 2030 targets on the Paris agreement.

The HLEG has now released its final report setting out recommendations for a financial system that supports sustainable investments. Welcoming the release of the final report, EC vice president for financial stability, financial services and capital markets union Valdis Dombrovskis said: “I believe this report is a manifesto for far-reaching reform. The Commission will use it to propose an EU strategy on sustainable finance in March, followed by several legislative proposals.”

To limit global warming to well below two degrees, Europe will need an estimated €180 billion in additional yearly investments, Dombrovskis continued. “Public money will not be enough. So we need to re-direct private capital towards investments in green and sustainable projects.”

“The future of finance will not only be digital, it will also have to be green,” he said.

On the basis of the HLEG report, the Commission will present the EU action plan on sustainable finance in March 2018, with a High Level Conference on sustainable finance scheduled to take place on 22 March 2018. Legislative proposals should follow in May 2018.

A spokesperson for the EC told The Accountant that the EU strategy on sustainable finance will have a strong environmental component as investment and finance needs are most pressing in areas like climate change mitigation. However, the spokesperson stressed that social and governance aspects will also be addressed as environmental concerns, while important, they are only one aspect of sustainability.

Amongst its recommendations, the HLEG suggested that the EC should set up an EU-wide sustainability taxonomy defining areas in need of additional investment, including climate mitigation. This would establish market clarity and comparability on what is and what is not sustainable investment, and re-direct capital flows towards sustainable assets.

“We need to define what is green and what is not green,” Dombrovskis said. “A unified EU classification is fundamental for the development of any green finance policy. We will follow up this recommendation with the first piece of legislation in spring.”

The HLEG also recommended that disclosure rules be upgraded to make sustainability risks and opportunities fully transparent, starting with climate change.  The current financial disclosure guidelines do not adequately explain the long-term suitability risks, making it difficult for the information to be evaluated across companies or financial products, according to the HLEG final report. More in depth disclosure requirements could ensure that sustainability preferences are taken into account and dialogue concerning sustainability is had on a company level and with beneficiaries, the final report suggested.

In that regard, the HLEG advocated for integration of financial and non-financial information in a company’s reporting. “The ultimate ambition has to be convergence or integration of financial and non-financial or sustainability information,” the report read. “Integrated reporting supports this convergence qualitatively through reporting that links sustainability factors with company strategy.”

This particular aspect of the report was obviously welcomed by the International Integrated Reporting Council (IIRC). Its CEO Richard Howitt said: “I pay tribute to the High-Level Expert Group for this incredibly timely and welcome report, which is a major step towards international efforts to creating a sustainable financial system. Implementing these changes will put Europe on the path towards a real sustainable future for the betterment of our planet, our people and our markets. Once again, the Group has identified just how crucial integrated reporting is to these efforts and we stand ready to play our role.”

By Madeleine Crean

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