EuroSIF Director Explains HLEG Final Report

    Flavia Micilotta, Executive Director of the European Sustainable Investment Forum (EuroSIF) and a member of the High-Level Expert Group on Sustainable Finance, explained the HLEG final report to guide the European Commission to make the EU sustainable, released last week, in an interview with’s Sam Morgan, reproduced below:

    How big a role does improving transparency play in the report?

    A great one. The HLEG group tried to focus on one of the main challenges to the achievement of a sustainable financial system and indeed, we soon agreed that the pervasive lack of transparency across the investment chain. Transparency is very much linked to disclosure of course and to the way this affects long-term investment decisions. The next few years will be critical in terms of bridging the gap around disclosure and transparency and the system has been awakened by article 173. Its impact resonated way beyond France and the rest of Europe still has to come to terms with it.

    Much has been done at the global level as well, and the work of the FSB’s Task Force on Climate-related Financial Disclosures [TCFD] has greatly shaped our thinking. Its endorsement from the European Commission is a recommendation that builds on the recognition of its value for investors and for all the players involved in this space. Connecting the TCFD compliant climate-related disclosure requirements into the EU NFRD is a tangible way of intertwining these two complementary pieces of work so crucial for transparency.

    By recommending that the Sustainable Development Goals and Paris Agreement goals be hardwired into the financial system, the report is big on transition, be it societal or energy in nature. Do you expect these recommendations to face opposition? “Nobody likes change”, after all.

    The SDGs and the Paris Agreement are already strong reference points in the financial sector. Take the SDGs alone, for example. They comprise a global and inclusive agenda to end poverty by 2030 and they tackle the root causes of poverty while looking to foster positive change for both people and planet. Promoting ESG [environmental, social and governance factors] adoption throughout the investment value chain can encourage greater private investment in sustainable development, resulting in greater impact.

    ESG integration refers to the explicit inclusion of ESG factors by asset managers into the traditional financial analysis. This investment process has been gaining momentum, not only in Europe but across the globe, becoming the most widely used strategy by SRI investors, whose large majority reportedly has a formal integration policy document. The ESG efforts by the various private actors are consistent with the Sustainable Development Goals (SDGs) but need to be leveraged further to achieve stronger outcomes.

    Some players and countries, like the Netherlands for instance, are already leading the way around this discussion and want to be recognised as leaders in this space. Europe needs this positive competition.

    The report cites France’s energy transition law as a good disclosure model. Are there any other instances where best practice at member state level should be adopted or mimicked closely at EU level? Are there any examples that will really clash with what is included in the report?

    There are a few good examples, one specifically is the one on SRI labels [sustainable responsible investments). Such labels have been developed by several countries in Europe over the years and different national players have striven to bring forward the highest standards for responsible investment in their country.

    Eurosif recognised most of these approaches as extremely valid and most of them are based on the Transparency Code Eurosif developed back in 2008 and which represents a solid process framework for labels. The recommendations around the development of a minimum SRI standard is looking to draw from all these examples at the national level in order to devise a European standard for SRI products that are easily recognizable and meaningful for the retail sector.

    How set in stone are recommendations like the sustainability taxonomy? We’ve seen factors like the price of renewable energy change rapidly in recent months, so is there room for manoeuvre?

    The need to create a solid and common narrative around sustainability as a robust reference point for all stakeholders represented one of the first main points of our work. Naturally, we soon realised that the lack of definitions on one hand and the infinite number on the other in this space had most certainly hampered the ability of Europe to mobilise capital at scale for sustainable development.

    A clear set of references at a European level which is able to guide investors by allowing them to navigate around the possibilities for sustainable investment was a clear starting point for many of the proposed recommendations to be unleashed. We recommend a roadmap to develop a fully fledged sustainability taxonomy done in consultation with several experts in order to ensure a greater level of collaboration and flexibility.

    The EU green bond market is similar to the emissions trading system in that it is a great idea that doesn’t seem to have tapped into its potential when put into practice. What needs to change for it to really take off?

    The EU emission’s trading scheme has had such a difficult time due to a combination of lobbying and recession which caused the market to stagnate and ultimate lose confidence. Investors need recognition and trust and in the case of green bonds, they have been asking for a strong endorsement and recognition at European level. In the last years, green bonds have been and continue to be an incredible investors’ tool to finance green projects to contribute to wider sustainability objectives.

    The European Commission has been investigating green bonds and their potential in the past years and commissioned studies which identified possible shortcomings, preventing them from achieving their full potential. Public sector measures had already been identified as potential solutions, together with standardisation. Establishing a European Green Bond Standard will help build on the transparency needed in the industry and help stakeholders ensure that the proceeds from green bonds are used for genuinely green projects with clear and measurable environmental objectives.

    Setting up a committee drawing from technical experts is set to guarantee working towards the adoption of harmonised global standards. Of note, the work in the green bond space is set to stimulate additional European sustainable product standards for other asset classes, such as EU Social Bond Standards.

    One big recommendation is empowering citizens to engage with sustainable finance. What is the best way to do this and what demographic should be targeted? Would it be best if the EU focused on young people, through social media?

    Of course, the education component is crucial in order to reach out to young generations. Indeed, the European Commission has no power to shape the education agenda in member states, but it can support them. After the latest financial crises, different players have been from within and outside the financial industry have taken up the challenges to increase the awareness and education on financial issues.

    Some good examples have followed but I think it is fair to say that sustainable finance is a topic which has not received the attention it deserves, far from it. Having said that, there are a number of activities being undertaken by different players on this the subject who need the strong backing of Europe in order to reach out even deeper to different segments of society. Funding is needed and the EU MFF is the right place to look at. The European Commission should also build interesting partnerships with the OECD and investigate how it could draw from existing resource and develop efficient synergies.

    It’s the beginning of 2018. Do you expect this report to influence the Commission as it thinks in earnest about the Multiannual Financial Framework and the post-2020 period?

     I believe this Commission will do all it can to set the stage for the recommendations it best sees fit and make sure they receive the proper endorsement and follow-up with the next Commission. The support this group has received has been tremendous and it echoed even outside the institutional setting. I doubt there will be a willingness to let it evaporate.

    The Commission will come up with an action plan in March. So is the HLEG’s work fully done now or will there be scope to continue working with the EU executive in the meantime or after?

    A number of the recommendations proposed foresee the collaboration of experts. The members of the HLEG have been privileged in that respect to be recognized as such and could continue to play a role in the concrete implementation of the work too.

    Image: (c) Fotolia

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