The European Commission’s High-Level Expert Group on Sustainable Finance (HLEG) has planted the seeds for the EU to build a truly green financial system.
Its final report – released on 31 January – has the potential to unlock major barriers to green finance and provide the leverage to scale up climate action across the continent, as it guides the EU towards a green economy.
Here are our top three takeaways from the report:
1) A shift to long-term risk management
Just 5% of European pension funds currently consider climate risks.
Central to the HLEG's recommendations is the shift away from short-termism, so that the horizons common in today's financial world are replaced by the long-term interests of savers.
The report calls on the EU to upgrade investor responsibilities, recommending European investors explicitly integrate climate risks into their legal fiduciary duties, and – just as France's Article 173 law has done – consider risks over the timeframes of their clients’ assets.
Embedding these long-term environmental risks into decision making and being encouraged – through regulation – to give forward looking analysis will be critical for our financial system to support a well-below 2-degree pathway.
This also makes business-sense. Bringing environmental risks into focus allows investors to better price and manage them, and enables companies to make long-term investments without fearing share price dips.
Central to this: High-quality information.
Over 7,000 companies worldwide now report their sustainable transition plans through CDP. Our work gives investors information covering most of Europe's market capitalization.
For hundreds of companies, these transition plans already include setting science-based emissions reduction targets, and the use of internal carbon pricing mechanisms.
The next step on the pathway to a truly sustainable economy is strong regulation to mandate further disclosure, filling in the gaps, and delivering investors the information they need to fulfil their fiduciary duty.
2) Environmental reporting is going mainstream – but it needs to happen faster
The HLEG also endorses the Taskforce on Climate-related Financial Disclosure’s (TCFD) recommendations, aimed at mainstreaming climate information in financial reports.
It calls for the recommendations to be implemented when the EU revises its Non-Financial Reporting Directive (NFRD) in 2018/2019, which sets out mandatory disclosure rules for companies in the bloc.
Transitioning over this timeframe will help protect against system shocks, but while we are moving towards meaningful mandatory disclosure, EU rules will not be TCFD compliant until 2021 at the earliest. It is crucial that the NFRD review is not delayed.
Businesses are already adapting to this new era in disclosure.
Seeing better reporting as an opportunity that brings long-term investment in their transition plans, more than 240 major companies worth over $5 trillion have now endorsed the TCFD.
And CDP's upgraded disclosure platform will see more than 6300 companies providing investors with TCFD-compliant disclosure for the first time this year.
That's why CDP welcomes the HLEG's recommendation to speed up voluntary adoption until regulation kicks in.
We urge the European Union to send a clear message to the business community, by beginning to implement the TCFD and speed up the process of unlocking the level of investment needed to secure changes at scale.
3) A green fund future is in our grasp
Acknowledging Climetrics as one of the most advanced ratings on the market, the report calls on the EU to develop a new green label for funds by 2019. This would enable retail investors to play their part in building a financial system that works, long-term, for people and planet.
These retail investors hold 40% of the EU's total assets. They are a missing link. And they must be empowered to vote with their money for the future they want.
As the benchmark for measuring funds' climate-related impact, accelerating the adoption of Climetrics will be a critical lever for long-term climate action.
CDP is dedicated to increasing the pace of our transformation, and Europe is now at a tipping point. The EU High-Level Expert Group on Sustainable Finance sets out a strong pathway to tackle urgent key issues on the way to a sustainable financial system.
As the European Union now makes concrete steps, CDP will support the process, offering the most meaningful tools that policymakers, investors, companies and cities need to make the right decisions now as we create a sustainable financial system in Europe.