ESG policy initiatives gain momentum

We are seeing strong leadership by members of the European Union and the launch in many other countries of initiatives that champion sustainable investment practices and pay heed to pressing social and environmental issues. The need for this drive is clear, given that Europe alone needs about $215 billion in additional investment each year to keep the dangerous rise in global temperatures below 2 degrees.

More and more countries have started to fly the flag for responsible investment through their policy endeavours. Indeed, the Principles for Responsible Investment (PRI) has identified about 300 instruments that support investors considering long-term value drivers including ESG factors. More than half of these were created between 2013 and 2016.

It has been just over a year since China issued guidelines for establishing a financial system that mobilises and incentivises private capital to invest in green sectors, while also restricting investment in those that pollute the environment. Meanwhile, France’s Article 173, the Energy Transition for Green Growth Law, adopted in 2015, has picked up interest across the globe, due to its pioneering plan to combat climate change and diversify sources of energy. Article 173 came into effect at the start of 2016 and marked a turning point in carbon reporting, strengthening disclosure requirements for listed companies and introducing carbon reporting for institutional investors.

Progress has also been gathering considerable pace in Germany. In May this year, Deutsche Börse unveiled the Frankfurt Declaration, aimed at catalysing the “holistic mobilisation” of sustainable market infrastructures. This October, Deutsche Börse and the German Council for Sustainable Development unveiled a Hub for Sustainable Finance (H4SF), through which they will pool resources and co-ordinate activities to review regulatory issues and develop market incentives and instruments to encourage sustainable finance. The PRI is one of the founding members of H4SF’s steering committee.

Similarly, Brazil – which aims to reduce emissions by 37 per cent by 2025 – has just launched a Green Finance Lab, bringing together investors, regulators and representatives of key economic sectors, among others, to develop investment instruments and financial structures that maximise private-sector leverage and optimise the use of donor funds.

Closer to home, the UK’s Minister for Climate Change and Industry and the Economic Secretary to the Treasury recently announced a Green Finance Taskforce, on which the PRI serves, to support the government’s clean growth plans.

High level catalysts

These initiatives and many others are building on the momentum of what has become a well-known acronym in the sustainable investment universe: HLEG – the European Commission’s High-Level Expert Group on sustainable finance, formed at the end of 2016. In its latest interim report, the HLEG recommends reforms to EU rules and financial policies, including fundamental changes for the investment culture and behaviour of market participants, with the underlying message that “urgent action is needed”. Specific recommendations include developing a single EU-wide taxonomy for sustainable assets, clarifying fiduciary duties, and aligning reporting rules with the recommendations of the Financial Stability Board Task Force on Climate-Related Financial Disclosures.

The interim report is closely aligned with the PRI’s work on a sustainable financial system, as outlined in our recently launched 10-year Blueprint. As an observer of HLEG, we have been engaging our 1800 global signatories regarding the group and its mission, along with sharing our framing analysis and technical expertise, which includes initiatives on fiduciary duty, stock exchanges, investment practices and credit ratings agencies. The PRI views HLEG’s recommendations as an important step towards an ambitious, but achievable, plan to align Europe’s financial system with pressing sustainability challenges.

Fiduciary roadmaps

In addition to the Blueprint, the PRI, along with the United Nations Environment Programme Finance Initiative and the Generation Foundation, has been busy publishing fiduciary duty roadmaps in eight countries, with recommendations to implement clear and accountable policy, and practice that embraces the modern interpretation of fiduciary duty. We are also forming an expert group of policy professionals for real-time sharing of information on policy and regulation.

It is encouraging to see the issue of financial sustainability climbing up the political agenda. The dial is certainly moving in the right direction, albeit with individual countries at different stages, and challenges unfolding along the way. To overcome these obstacles, the PRI has launched several projects that address the underlying barriers to a sustainable financial system. These are based on the readiness of investment trustees to operate in a sustainable system, asset consultant advice and the limitations of modern portfolio theory, given today’s investment challenges. By addressing unsustainable aspects of the markets in which investors operate, we can deliver a sustainable financial system that contributes to a more prosperous world. At stake are not only the long-term returns of savers, but also a greener economy and a sustainable future.

Nathan Fabian is director, policy and research, Principles for Responsible Investment.