EU HLEG Sustainable Finance consultation response

HLEGI eventually finished off and submitted my EU HLEG Sustainable Finance consultation response yesterday, just in time for the ‘High Level Expert Group’s’ first deadline…

This is of course a significant and very welcome consultation – however responding to it was by no means an easy task – given its length and complexity (meaning that my response may still benefit from some tidying up!).

In the spirit of sharing – and the need for more sustainable finance – here are my key points, based on more than a few years in retail SRI:

These are listed in the order in which they appear in the report:

  1. The EU should not underestimate the complexities of investment/fund labelling and should articulate who any labels are for, eg retail v institutional – as needs differ. (I included information on and links to my SRI Styles classifications for retail fund investors – as used on www.FundEcoMarket – which were hard enough to set!)
  2. The EU should focus on creating a business environment that ensures sustainable businesses outperform their less sustainable counterparts. (The implication being that if this fails the financial community will remain unchanged.)
  3. The document should not hide from the fact investors need to generate a profit – it is why people invest.
  4. The profile of sustainability should be increased across all financial products and services, particularly the ‘know your client / best advice / fact finding’ areas of financial advice.
  5. ‘Sustainable Infrastructure Europe’ could function in many ways but should focus on creating a legal / business (etc) framework where the business case for making money from more sustainable operations ‘becomes beyond reasonable doubt’. (Mechanisms include legal, tax etc.)
  6. Don’t be sidetracked by what is happening in the USA as this is contrary to the public good and longer term profitability.
  7. The mismatch of the horizons is particularly significant for retail investors whose horizons’ span decades not days, weeks or quarters.
  8. Retail (and other) product disclosures should require all investments to state their position on sustainability. This would raise the profile of sustainability and ensure EOS PRIIPS, SRI etc products are not put at a competitive disadvantage by having to ‘disclose’ more than their less sustainable counterparts (as currently proposed). This would also help all advisers and investors to make better informed decisions.
  9. Requiring all funds to explain how they consider sustainability issues and requiring advisers /distributors (as appropriate) to assess clients’ views on this area would drive change amongst investment analysts.
  10. Consider aiming for an end point where all products disclose their position on sustainability -so that this becomes traceable through the ‘supply chain’, for the benefit of all investors
  11. Across the board regulatory change aimed at ensuring more sustainable businesses outperform their peers would be the best way to drive change amongst (international) credit rating agencies.
  12. The incomplete and risky nature of conventional benchmarks should be brought to investors’ attention.
  13. Investors in banks and insurance companies should be encouraged/helped to assess the sustainability risks of such investments based on the way those companies operate.
  14. Social issues, where the business case for change may be more opaque, should be openly regarded as different from issues like climate risk. This will help attract ‘the right kind of investors’ and divert criticism. (The fact this may not appeal to all investors should not be viewed as a problem, opinions will almost always vary.)
  15. A ‘sustainability test’ (recommendation 5) sounds like a good idea but should be rolled out to all sectors
  16. Benchmarks and in particular passive funds require additional attention as this is a growing area of concern

I’d welcome hearing from anyone who has opinions on these are areas – including if you think I have got anything very wrong!

Their final, final deadline is the 20th September- and debate is (almost) always welcome 😉

Click here to submit your own response.

ps. Key points to note, in case you are not familiar with this consultation:

  • 6 of the 20 HLEG group are investment professionals from the UK
  • Implementation of this report is planned to start in early 2018, so this is very likely to apply to the UK irrespective of Brexit
  • The report is 75 pages long and contains much excellent content