The European Commission’s Sustainable Finance Action Plan and Other International Initiatives

Abstract

The actions proposed by the Commission’s Action Plan and analysed in this chapter respond to five broad strategies that can be defined as ‘public incentives’, ‘standardisation’, ‘disclosure’, ‘corporate governance’ and ‘financial regulation’. The first strategy consists of fostering investments through financial and technical support for sustainable infrastructure and other projects. In perspective, the European Commission will establish a single investment fund providing support and technical assistance to crowd in private investment. The second strategy includes the establishment of an EU taxonomy of sustainable activities which should help shifting capital flows towards them. It also includes the setting of standards and labels for green financial products, which should enhance the trust in the market of these products and ease investors’ access to them. These two strategies will help establishing well-defined and deep markets in sustainable investments and will work as preconditions to the others. The third strategy covers both corporate disclosure and third party information and assessments. The Non-Financial Disclosure Directive is being reviewed and complemented by other measures, such as an impact assessment of IFRS on sustainability. Sustainability benchmarks have been developed in order to allow investors to track and measure performance and allocate assets accordingly. In addition, credit rating agencies and market research services should integrate sustainability into their assessments. The fourth strategy combines sustainable corporate governance with attenuating short-termism in capital markets, and assumes that boards should develop their own sustainability strategies and act in the company’s long-term interest. Both disclosure and corporate governance are traditional strategies in capital markets regulation and functioning, while their extension to sustainability is a reflection of the new interest of investors and corporate stakeholders for ESG issues in addition to financial performance. The fifth strategy implies at least three types of regulatory reform. First, the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive (IDD) should be amended in the sense that investment firms and insurance distributors should consider sustainability issues when offering financial advice. Second, fiduciary duties of asset managers and institutional investors should be clarified so as to include ESG factors in the investment processes. Third, ESG should be incorporated in prudential requirements of financial institutions so that they channel their investments towards a more sustainable economy, while reducing the risks deriving from unsustainable economic development. These five strategies represent a very ambitious design of the European Commission which will require multiple actions at all levels. These actions generally require regulation and/or supervision often at EU level, but private incentives and cultural developments towards an environmentally sustainable economic system will also be important in furthering the success of the Action Plan.