The European Union has committed itself in international agreements to working towards a low-carbon, more resource-efficient and sustainable economy, as well as towards social goals, as recently in the Gothenburg declaration on the European Pillar of Social Rights. Financing these commitments to sustainable growth, taking into account environmental, social and governance (ESG) criteria, constitutes an enormous investment challenge that exceeds public funding capacities and will require additional resources.
The European Economic and Social Committee (EESC) believes that Member States need to build a common European sustainability framework in order to ensure support from the financial system in the transition. For this reason it strongly supports the European Commission’s Action Plan on financing sustainable growth and the legislative proposals stemming from it.
“The proposed framework is an important driver for restoring trust in the financial markets and connecting savings to – and reorienting capital flows towards – sustainable investment in the real economy.” So says Carlos Trias Pintó, EESC rapporteur for sustainable finance and institutional investors’ and asset managers’ duties regarding sustainability. He expects SMEs and green and social infrastructure projects to benefit from complementary funding resources.
In a package of three opinions on the Commission’s proposals, the Committee recommends a swift but gradual approach to implementing the Action Plan, given the complexity of the transition towards a sustainable economy. Stakeholders need time to adapt to the new reality.
Although the EESC’s opinions recognise the key role of financial market participants in the transition, the Committee emphasises that society as a whole must be involved. “A joint effort by all, including actors in the financial sector, companies, citizens and authorities, is needed to establish a feasible system,” says Trias Pintó.
Sustainability taxonomy and benchmarks are a good starting point for further action
For the EESC, it makes sense to start the transition to a more sustainable economy by establishing a European sustainability taxonomy, as well as low-carbon benchmarks. The taxonomy should be dynamic and based on a clear definition of ESG criteria. It should allow, among other things, for earmarking financial products regarding sustainability aspects to provide end investors with relevant and comparable information.
Daniel Mareels, EESC rapporteur on taxonomy and benchmarks, believes the proposed taxonomy is a good basis for further action and that a common approach on sustainability will be of the utmost importance. “A good and generally accepted European taxonomy should replace the existing national piecemeal approaches,” he thinks. “Where possible, it should be based on existing international frameworks.”
As the role of businesses will be essential for the transition to a sustainable economy, the taxonomy should take account of how they would implement it. It also has to be compiled taking on board differences between sectors and the size of businesses and aim for a feasible implementation, at both local and international level. “It is paramount that the taxonomy provides certainty, clarity and practicality,” notes Daniel Mareels.
For rapporteur Carlos Trias Pintó, the final aim should be to “promote the taxonomy worldwide and incorporate it into EU law uniformly and simultaneously in all Member States”. Measures must be introduced to make sure it is regularly revised and updated.
Social and governance factors must follow environmental factors
While the EESC agrees with starting by configuring and introducing a limited number of areas and legal obligations, beginning with environmental factors, it welcomes the introduction of minimum social and governance guarantees from the outset. It would then be important to extend the initial taxonomy and legal obligations to social sustainability and governance goals step by step in the future.
Fiduciary obligations will lead to more transparency
The EESC welcomes the proposed fiduciary obligations for financial market participants, envisaging the incorporation of ESG criteria into their activities, by asking for the sustainability preferences of their clients and by obliging them to disclose relevant information to end investors. This will allow the latter to align their investment decisions with their sustainability preferences, based on high-quality, clear and comparable information.
Communication and timeliness – Key factors for implementing the Action Plan
The EESC opinion package also draws attention to the crucial importance of communication for the success of the Action Plan. A corresponding communication strategy including all stakeholders and the general public should also be complemented by compulsory financial education to ensure that people understand this new sustainability approach.
Finally, the Committee highlights the potential of artificial intelligence for aligning the preferences of investors with the destination of investments and urges co-legislators to swiftly adopt the three legislative proposals from the Action Plan.