by Hank Boerner – Chair and Chief Strategist, G&A Institute

The European Union adopted a Sustainable Finance Action Plan in May 2018; the package of measures included a proposal for a regulation to establish a framework to facilitate sustainable investment.  The aim is to create a unified classification system or taxonomy on what could be considered to be “an environmentally-sustainable economic opportunity”.

Also in the plan:  a proposal for regulation on disclosures related to sustainable investment and sustainable risks to require financial sector players to integrate ESG in their risk processes and decision-making as part of their fiduciary duties.

The action plan also calls for a regulation to amend the benchmark regulation by creating a new category of benchmarks for low-carbon and positive-carbon impacts (this would provide investors with better information on the carbon footprint of their investments).

The latest move in the action plan is the mandating of disclosure by money managers, insurance companies, pension funds and investment advisors in how these financial sector players are integrating ESG factor in their portfolios and disclosing the details to their beneficiaries, savers, investors, and advisors.

The financial sector fiduciary organizations will have to disclose how certain investments of theirs might cause damage to the planet, such as polluting water (think: mining companies, oil & gas companies, chemical companies, and others) and how an investment might damage biodiversity.

Implementation of the European Commission plan requires amending the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive, and other directives or by adopting new “delegating acts” under the directives.

Also to be expected:  establishing an EU label for “green” financial products, those that comply with green or low-carbon criteria.

Two years ago the EU adopted ESG disclosure policies for public companies (the EU Directive for Non-Financial Disclosures and an Accounting Directive that was adopted by all 28 states); this corporate reporting directive could be strengthened as part of the action plan to assure that companies are providing the right information to investors.

All of this is to further ensure that the financial sector players invest more responsibly, said Valdis Dombrovskis, the EU vice president responsible for financial stability, financial services and the Capital Markets Union (CMU) in talking with Editor Paulina Pielichata of Pensions & Investments.  \

The CMU is a plan of the European Commission to mobilize capital in Europe and channel it to companies and infrastructure projects to expand and create jobs, part of the vision of creating a single market for capital in the union.

She had written back in June 2018 after the announcement of the action plan that disclosure of sustainability and low-carbon attributes of investment strategies will soon be standardized as the European Commission worked on creating better transparency for those strategies for moving toward a lower-carbon economy.

There’s more information for you at the EU Sustainable Finance web site: https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance_en

This Week’s Top Story has the current Pension & Investments report by Paulina Pielichata on the latest moves by the EU on the action plan:

This Week’s Top Story

EU agrees to sustainable investment disclosure framework   
(Friday – March 08, 2019) Source: Pension& Investments – The European Parliament and European Union countries agreed Thursday on sustainable investment disclosure rules for institutional investors. Under the agreed rules, money managers, insurance companies, pension funds and…

Looking at Green Finance in the United States of America
Citi announced issuance of its first green bond in January, as part of the Citi Group commitment to environmental and climate finance.  The bond will fund renewable energy, sustainable transportation, water quality and conservation, energy efficiency, and green building projects (all part of the organization’s US$100 billion Environmental Finance Goals (announced in 2015). 

In January, Citi issue EU1 billion, 3-year fixed rate notes. Citi is a co-founder of the Green Bonds Principles (2014). Citi VP Michael Eckhart is the key player (he is head of environmental finance and was a principal player in creation of the Principles). 

On April 11th in New York City the Fixed Income Analyst Society (FIASI) will hold an event at the University Club in midtown — “ESG Integration in Fixed income:  How Credit Analysis of Risks and Opportunities is Evolving”. 

The event will explore the drivers and current status of ESG integration in fixed income; focus on developments at the largest credit rating agencies regarding ESG integration in creditworthiness, and how investment management firms are considering ESG risks & opportunities in fixed-income investing.

Global sustainable investment assets reached US$23 billion in January 2016, FIASI points out, and one of the fastest-growing segments is ESG integration.  There’s a broad spectrum of methods involved, and for fixed-income instruments, there are higher levels of complexity in evaluating “green” issues than for equity, FIASI explains.

Speakers from Moody’s, Fitch, S&P, TD Asset Management, Loomis-Sayles, JP Morgan Asset Management, APG Asset Management, and others will be speakers, moderators and panelists.  For information: https://www.fiasi.org/esg-conference

Information about FIASI is at: https://www.fiasi.org/