Commission goes for broke; sustainably.

In what felt as an emotional day for the European Commission, it presented and launched its Sustainable Finance initiative at a conference attended by the who’s who of Brussels as well as leading European politicians. As further endorsement of the Commission’s vision, French President Emmanuel Macron delivered an impassioned speech fully supporting the initiative, going as far as to say that regulating every aspect of the financial system was necessary to ensure it is ‘sustainable’.

However present the political will is to move this initiative forward, the goal of making the financial system ‘sustainable’ or to achieve the ‘greening’ thereof, the Commission has a mammoth task ahead of it. While the Action Plan outlines which hard policy measures will be taken and by when they should be implemented, in-depth discussions on these measures did not surface during the conference and for the moment are only taking place behind closed doors. Herein may lie a problem, particularly regarding the keystone piece of legislation around which the Commission will build, the so-called ‘EU sustainable taxonomy’.

The taxonomy will essentially define what is ‘sustainable’ through what initial reports describe as a ‘living’ piece of legislation i.e., level 1 legislation will establish the broad outline of the taxonomy, following which the Commission will publish level 2 legislation with the finer details of what is ‘sustainable’. This will also allow the Commission to adapt the taxonomy over time, where it will initially focus on CO2 mitigation measures (environmental) first before moving on to the social and governance (ESG) factors.

Nevertheless, defining what is ‘sustainable’ is deeply subjective, difficult and most importantly, politically charged. The Commission has its work cut out for it if it is to form a majority in time to meet its self imposed implementation deadline of Q3 2019. On top of the political challenges the Commission faces, it has little-to-no experience in developing a taxonomy, this lack of know-how appears to be, for the moment at least, slowing the policy formulation process.

Another proposal that the Commission is seeking to advance quickly is the incorporation of ESG factors into the fiduciary duties of asset managers. Commission Vice-President Valdis Dombrovskis argues that as asset managers “play an influential role as intermediaries between companies and their end-investors,” they should have a duty to work closely and transparently with clients and consider sustainability in asset allocation and risk-management. This idea has already been met with considerable pushback from the asset management industry, it appears here that the Commission will also face an uphill battle.

Separately, the European Parliament’s (EP) Economic and Monetary Affairs (ECON) Committee is currently in the process of finalising its own-initiative report. MEPs have for the moment set outside their usual political and ideological differences as many feel that the importance of the initiative warrants rapid progress. Additionally, MEPs are keen to finalise their position ahead of the Commission’s first legislative proposals being published, with the hope of influencing the drafting, this does not appear to be feasible due to timing constraints but the report will provide a snapshot into the political groups positions’ ahead of legislative negotiations.

On balance, while no policymaker – at the EU or Member State level – can deny the importance of the initiative, the reality remains that the issues the Commission is aiming to tackle are political, challenging and vast. While the clear and high-level political will to move the initiative forward will no doubt expedite the legislative process somewhat, the pace of negotiations will hinge on the finer details as well as the institutional capacity of the EU, which is already processing other major initiatives such as the ‘Basel IV’ package.



Salvatore Ferrara