The Principles for Responsible Investing’s (PRI) head of EU and UK policy has issued four recommendations to governments, investors and companies to revise sustainable finance strategies amid a once-in-a-generation opportunity
In April 2020, the European Commission (EC) launched consultation on a Renewed Sustainable Finance Strategy, emphasising the need to consider the impact of the Covid-19, while also not forgetting sustainable goals.
The Renewed Sustainable Finance Strategy included actions points to step up the drive of private capital towards sustainable investments remarking that financial sectors will have to undergo a “large-scale transformation”.
In a blog post, head of EU and UK policy at the PRI Alyssa Heath highlighted the PRI’s response to the consultation, and warned capital markets remain unsustainable and the “implications for European savers and citizens are profound”.
“The revised sustainable finance strategy is a generational opportunity – to put in place guidance, tools and regulation; to remove barriers; to realign Europe’s capital markets with sustainability objectives; and to work urgently with governments and investors beyond Europe’s borders,” she said.
“That this should be achieved is not inevitable. It requires concerted action from governments, policymakers, investors and companies.”
The PRI made the following recommendations to support the success of this strategy:
1. The revised strategy should provide a clear, ambitious and compelling vision of the finance industry of the future, aligned with the Paris Agreement and the Sustainable Development Goals (SDGs)
For example, Heath explained a system where EU citizens’ long-term savings and investments are “fully resilient to future sustainability shocks and can be aligned with their values, where institutional investors systematically track, measure and optimise the outcomes (positive and negative) from investment activity”. She also added “a vibrant and flourishing market for sustainable products enables a race to the top between providers”. Although she said many of the building blocks for a sustainable financial system already exist, developed through the existing Action Plan on Sustainable Finance, how they relate to the long-term vision for the sector, and to each other, is missing.
2. It must build from a strong foundation
In some cases, implementation of the existing Action Plan is falling short, Heath said. The PRI has contributed extensively to initiatives such as the EU Taxonomy, the Disclosure Regulation and the Non-Financial Reporting Directive, but there are concerns these initiatives are “developing in isolation from each other” and in places are “not based on an adequate understanding of investment practice”.
Heath urged for further sustainable finance measures to also be prioritised:
“This consultation covers a huge array of potential topics, many of which are different approaches to the same fundamental questions around risk, impact and disclosure.”
She also outlined how the new strategy must also accurately reflect the tools investors have to create change: “It must move away from the assumption that the impact of an investment strategy is the same as the characteristics of the underlying portfolio, and instead support and develop the full range of tools investors have available to influence real-economy outcomes, including capital allocation, stewardship and real-economy policy engagement”.
3. Sustainable finance must be central to a green recovery
Heath said in her blog, as Europe begins to emerge from the Covid-19 pandemic, investors have signalled deep support for Europe’s green recovery, and many are considering the role they can play. She added the proposed €1.8trn recovery package will shape Europe’s economy in the coming decades, but the Sustainable Finance Action Plan must also work alongside the green recovery and contribute to the UN’s Sustainable Development Goals.
“Central to this, we see the EU Taxonomy – expanded to include social issues – as a tool to enable investors, issuers, policymakers and other stakeholders to work together in pursuit of a sustainable and equitable European economy, true to the original vision of the High Level Expert Group on Sustainable Finance.”
4. The EU must work towards international ambition and greater harmonisation
Finally, she highlighted the EU’s action will resonate around the world, and therefore will set a standard for a global financial framework aligned with sustainability.
“As a first mover, Europe will benefit – but must also work with other willing countries, and investors around the world, to develop international applications.”
She said as many investors operate across the globe, and many EU sustainable finance regulations, such as the EU Taxonomy or the SFRD, require investors to disclose information about the sustainability risks irrespective of where the investees are, there is a “clear and urgent need for harmonisation of corporate and investor disclosure requirements and taxonomies”, which can support the implementation of the Paris Agreement and the SDGs.
To view the PRI’s full response to the European Commission consultation on the renewed sustainable finance strategy click here.