ESG: European Commission consults on Renewed Sustainable Finance Strategy

Background

The renewed strategy is an integral part of the European Green Deal and the Commission’s efforts to ensure a sustainable and resilient economic recovery following the COVID-19 outbreak. 
 
With the adoption of the European Green Deal on 11 December 2019, the Commission announced that the financial system as a whole is not yet transitioning fast enough towards sustainability. Progress has already been made with the Commission’s 2018 Action Plan on Financing Sustainable Growth, but efforts need to be stepped up. In addition, the Commission is also of the view that a more sustainable financial system should support the prevention of pandemics such as the COVID-19 outbreak. 
 
In this context, the Commission announced that the financial and industrial sector will have to undergo a large-scale transformation, requiring massive investment as is further set out in the Renewed Sustainable Finance Strategy.

Renewed Sustainable Finance Strategy

Building on the Commission’s 2018 Action Plan on Financing Sustainable Growth, the Renewed Sustainable Finance Strategy will focus on three areas: 

1. Strengthening the foundations for sustainable investment, by adapting company reporting and transparency, accounting standards and rules, sustainability research and ratings, labelling tools for financial assets and products and corporate governance, long-termism and investor engagement;
   
   According to the Commission this first pillar is necessary because, many financial and non-financial companies still focus excessively on short-term financial performance instead of their long-term development and sustainability-related challenges and opportunities;
    
2. Increasing opportunities for citizens, financial institutions and corporates to actively engage in the sustainable finance debate regarding green investments and investor protection;
   
   With this second pillar, the Commission aims at maximising the impact of the available frameworks and tools in order to “finance green” and to enhance sustainability. Among others, citizens can be mobilised by providing them with opportunities to invest their pensions and savings sustainably and financial institutions and corporates can increase their contribution to sustainability if the right policy signals and incentives are in place; and
    
3. Reducing and managing climate and environmental risks and integrating them into financial institutions and the financial system as a whole, while ensuring social risks are taken into account where relevant;
   
   The third pillar aims at reducing the exposure to climate and environmental risks and their possible negative social impact in order to avoid a disruptive impact on our economies and financial system and to further contribute to “greening finance”.

Consultation

The consultation document consists of 120 questions and covers many topics in the field of sustainable finance that affect both financial institutions as well as corporates. The consultation requests feedback on, among others, proposals to:

• assist companies and investors towards integrating long-term horizons and sustainability factors such as  human rights violations, environmental pollution and climate change in their decision-making processes alongside financial interests of shareholders, beyond what is currently required by EU law;
• assess in view of the Shareholders Rights Directive II whether there should be a mandatory fraction of a (non-)financial company’s directors variable remuneration linked to non-financial performance and whether transparency requirements to better align long-term interests between institutional investors and their asset managers should be further enhanced;
• incorporate sustainability preferences of retail investors in the financial system and committing to raising awareness of sustainable finance among citizens and finance professionals;
• assess whether sustainable investments could be scaled up through: (i) the provision of a revenue-neutral public sector incentive; (ii) the implementation of a green adjusted prudential treatment and (iii) the increase of public guarantees or co-financing;
• mitigate financial exclusion resulting from digital exclusion by maximizing the potential of digital tools for integrating sustainability into the financial sector;
• assess the suitability of the current banking and insurance prudential frameworks to mobilize the financial services industry to finance the transition and manage climate and environmental risks;
• support the development of a common, publicly accessible, free-of-cost environmental data space for companies’ ESG information;
• identify existing financial accounting rules that may hamper the adequate and timely recognition and consistent measurement of climate and environmental risks;
• manage conflicts of interest and enhance transparency in the market for sustainability assessment tools in view of  the variety of ratings, research, scenario-analysis and ESG benchmarks that are offered by specialized agencies;
• standardize sustainability-linked bonds and loans whose interest rates or returns are dependent on meeting pre-determined sustainability targets; and
• assess whether the current capital markets infrastructure hampers the growth of sustainable financial instruments.

Even though it is likely that the more pressing short-term needs around COVID-19 will cause some delay to forthcoming and ongoing legislative initiatives, the Commission confirmed that the Green Deal remains a top priority: 
“the ongoing COVID-19 outbreak in particular shows the critical need to strengthen the sustainability and resilience of our societies and the ways in which our economies function”. 
 
The consultation will be open until 15 July 2020. The Commission’s aim is to adopt the Renewed Sustainable Finance Strategy in the second half of 2020.

Further information

For further information please contact the members of our ESG Corporate and Financial Markets Team. We have also published a new dedicated website: StibbeESG.com. With this new website we aim to provide key insights on the current and upcoming sustainability and ESG regulation by collecting the most important news, publications and case law in one place, supplemented by our commentary.