Learn Bitcoin in One Hour! Click to get a 70% discount on Udemy.
TO GAUGE an issue’s importance, a guest list is a good place to start. The one for a conference in Brussels on March 22nd to discuss the European Union’s “action plan” on sustainable finance features heavy-hitters including Emmanuel Macron, France’s president, and Michael Bloomberg, a former mayor of New York who campaigns on climate change. Given that sustainable finance is well-established, what action does the EU think is needed?
Investing with an eye to environmental or social issues, not just financial returns, has become mainstream in the past decade. According to the Global Sustainable Investment Alliance (GSIA), $23trn, or 26% of all assets under management in 2016, were in “socially responsible investments” that take account of environmental, social and governance (ESG) issues. New asset classes have sprung up. According to SEB, a Swedish bank, the issuance of green bonds, the proceeds of which are invested in environmental projects, reached $163bn in 2017, up from less than $500m in 2008.
Yet standards are a hodgepodge. Many certification and evaluation tools cover just one asset class; competing methodologies abound. It is here that the European Commission, and an advisory group of experts, sees a role for public policy. One aim is to create a framework within which to classify the sorts of activities that qualify as sustainable investments, and against which to benchmark existing standards. The commission proposes setting up an EU labelling scheme for green bonds.
It also plans to draft a law by mid-2018 to require all asset managers to consider ESG factors when giving advice, and to explain how they are doing so to their investors. The European Fund and Asset Management Association, an industry group, worries that this would turn ESG investing into a box-ticking exercise. But Christian Thimann of AXA, an insurer, and the chair of the expert group, argues that many financial firms still ignore clients’ environmental or social preferences. Compelling them to tick boxes would be better than nothing, he thinks.
Another of the proposals has drawn fiercer criticism: to loosen capital requirements for banks’ green investments. That goes against a decade’s worth of financial regulation, which has sought to bolster banks’ capital buffers. Even the commission’s expert group seems dubious, writing that the proposal does not “seem to be quantitatively grounded”. (The commission insists any changes will take financial stability into account.)
However the debate on capital requirements is resolved, the commission’s plans look likely to boost sustainable finance in Europe. That will not turn the global financial system green on its own. But it will show how financial rules can be harnessed for environmental ends.