An Overview of the HLEG’s January 2018 Report

After a year of research, an interim report and a public consultation, the 20 members of the High Level Expert Group (HLEG) on Sustainable Finance released in January 2018 their final report.

It includes policy recommendations to the European Union (EU) Commission to inform its Action Plan on Sustainable Finance, which aims at integrating sustainability into the functioning of the EU financial system by enabling and galvanizing the flow of public and private capital towards sustainable investments all while protecting its stability.

Structure of the report

After exposing its vision for a sustainable EU financial system, the report highlights eight key recommendations. The third part of the report underlines eight other areas where sustainability could be included. Then, the HLEG had the intelligence to translate its overall recommendations for each player and sector in the financial system. The last part is more aspirational and tries to reconcile its recommendations with their social dimension and advocate for taking into consideration in the financial system “natural capital”.

Key recommendations from the report

  1. Establish and maintain a common sustainability taxonomy at the EU level.
    • Detailed in an appendix to the final report, the sustainability taxonomy suggested by the HLEG is broad and encompassing. Agreeing on a common taxonomy is the first logical step to build a “sustainable” financial system.
  1. Clarify investor duties to better embrace long-term horizon and sustainability preferences.
    • This recommendation includes several specific recommendations to balance fiduciary duty with the consideration of ESG and sustainability factors. It involves both asset managers and institutional investors. This recommendation resonates with recommendation #5.
  1. Upgrade disclosure rules to make sustainability risks fully transparent, starting with climate change.
    • This promising recommendation includes both ESG assessment (prior to investing) and ESG management (during the investment/holding period). More specifically, the idea is to make compulsory a forward-looking analysis as to how portfolios align with energy and environmental transition. Disclosure is more geared towards the “ E” (environment) than the “S” (Social) or “G” (Governance) dimensions.
  1. Key elements of a retail strategy on sustainable finance: investment advice, ecolabel and SRI minimum standards.
    • This section advocates for making the sustainable impact of one’s investment part of the routine of giving and receiving financial advice. It echoes recommendation #3 and #5 about the need for greater transparency at the retail investor level and specifically recommends creating a green label for financial products and minimum standards for “sustainable funds”.
  1. Develop and implement official European sustainability standards and labels, starting with green bonds.
    • Detailed again in an appendix, the HLEG laid the groundwork for EU standards for green bonds, drawing on the work from the G20 Green Finance Study Group, Financial Stability Board’s Task Force on Climate-related Disclosures.
    • However, the focus on green bonds, which is one of the most talked-about assets, is somehow detrimental to other “sustainable assets”, a notion which remain vague in the report.
  1. Establish ‘Sustainable Infrastructure Europe’.
    • The recommendation advocates for the creation of a central body that would work towards developing and financing sustainable infrastructure across the European Union. It is interesting in its cross-cutting approach, beyond energy, encompassing: Information and communication technologies, water treatment and supply, circular economy, waste and transport and logistics.
  1. Governance and Leadership.
    • The HLEG recommends that insurance companies, investment firms and credit institutions be assessed on their internal governance and whether they take into account sustainability risk. It also advocates for the inclusion of specific duties related to sustainability for directors.
  1. Include sustainability in the supervisory mandate of the ESAs and extend the horizon of risk monitoring.
    • The recommendation title is self-explanatory and the extension of time-horizon is one of the most promising features of this recommendation.

Conclusion: Assessing the impact of the HLEG’s final report on EU’s sustainable finance strategy

Two factors contributed to the success of the HLEG in drafting recommendations that were, in their vast majority, included in the EU policy roadmap for sustainable finance. The first is its broad member-base, encompassing civil society, academics, and industry, completed by observers from key stakeholders and institutions at the EU-level and UN-level. The second is the depth of its research, scanning the existing universe of EU legislation to highlight paths to implementation, especially for its eight key recommendations.

As a result, in May 2018, drawing from the preliminary work of the HLEG final report, three concrete measures were already well under way: the EU green bonds standards, ESG disclosure metrics for institutional investors and asset managers, and methodologies for new low-carbon and positive carbon benchmarks. Overall, the HLEG legitimized the action plan on sustainable finance, though some have argued that despite the public consultation undertaken, most respondents were still rather large actors in the finance industry and not the everyday European citizen. The EU still has some work to go beyond its technocratic tendencies.