The EU's High-Level Expert Group (HLEG) on Sustainable Finance, set up by the European Commission in December 2016, has produced its final recommendations. The Commission has pledged that these proposals will form part of its sustainable finance action plan that will be discussed at a conference in Brussels in March.

The HLEG made recommendations across all areas of investment finance. In respect of institutional investors, it recommended that investor duties be clarified to extend the time horizons of investment and bring greater focus on environmental, social and governance (ESG) factors into investment decisions.

The EU's High-Level Expert Group's report stated that linking investor duties to the investment horizon of the individuals or institutions they serve and requiring, within institutional client relationships, informed consent on sustainability issues was essential. It suggested that an EU omnibus proposal would ensure that these changes took place across the entire investment chain. The clarified duty, the report said, would require that all participants in the investment chain pro-actively seek to understand the sustainability interests and preferences of their clients, members or beneficiaries.

The report also recommended improving Europe's disclosure rules to make climate change risks and opportunities
fully transparent. There needed to be an interconnecting framework of effective sustainability disclosure covering financial products, financial assets, financial institutions and financial authorities, the HLEG said.

Responsible investor pressure group, ShareAction, recognised that these recommendations fulfilled some of its key demands. Bethan Livesey, its head of policy said: “We welcome the HLEG’s report, which draws together some of the key areas for building a sustainable financial system. We are particularly pleased to see the strong focus on clarifying investors’ duties, something that ShareAction has been pushing for since 2010. It is great to see the EU showing leadership in this area and we urge the Commission to now adopt a strong legislative proposal.

“Ordinary people should be at the heart of a sustainable financial system that serves society. We welcome the recognition that beneficiaries’ interests are not limited to financial returns only. In ShareAction’s experience, ordinary savers may not always connect with the technical elements of finance, but they often care deeply about the impact it has on the environment and communities around them. We also welcome the renewed focus on retail investors, which was missing from the interim report. An accountable and strong Capital Markets Union will only be possible if retail investors can be confident that their money is invested responsibly. We congratulate the HLEG for this inclusion.”

The EU's High-Level Expert Group also proposed:

• a classification system, or 'taxonomy', to provide market clarity on what is 'sustainable'
• an EU-wide label for green investment funds
• making sustainability part of the mandates of the European Supervisory Authorities (ESAs)
• a European standard for green bonds.

The European Commission said it would now move to finalise its strategy on sustainable finance on the basis of the recommendations. Delivering an EU strategy on sustainable finance is a priority action of the Commission's Capital Markets Action Plan as well as one of the key steps towards implementing the Paris climate change Agreement and the EU's Agenda for sustainable development. To achieve the EU's 2030 targets agreed in Paris, it needed around €180 billion of additional investments a year, the Commission said, and the financial sector had a key role to play in reaching those goals, as large amounts of private capital could be mobilised towards such sustainable investments.

Simon Lewis, Chief Executive at the Association for Financial Markets in Europe (AFME), which represents the financial sector across the continent said: “The Commission’s final report on sustainable finance is a big step in the right direction. The plans to ease capital charges for banks’ green investments, provided they are commensurate with the risks assumed, can play an important part in the development of a Capital Markets Union. It will also help to encourage the financial sector’s contribution to sustainable and inclusive growth. It is crucial that capital markets are geared towards ensuring social and environmental sustainability and we look forward to working with the European institutions to take forward those areas of the HLEG report requiring further discussion and analysis.”

However, the AFME said premature standardisation of disclosure rules should be avoided. Better voluntary disclosures should be focused on materiality, it said, to improve investment decisions through the work of the industry-led Financial Standards Board's Task Force on Climate-related Financial Disclosures and the Non-Financial Reporting Directive.

The association also did not agree with the HLEG's opinion that sell-side analysts do not currently consider ESG criteria when preparing research. The AFME said many AFME members had ESG- or climate change-specific analyst teams with many years of experience required to assess the materiality of ESG-related risks to a sector or security. Although there was no industry-level best practice on the inclusion of ESG criteria, many firms use their in-house frameworks to integrate such criteria in their research, the AFME said.

The HLEG issued its interim report last July and made eight early recommendations then which the Commission has begun work on. This included launching a consultation in November to gain views on how asset managers and institutional investors could include ESG factors when making decisions. This consultation finished at the end of January.