EU action plan: pragmatism is needed

The EU Action Plan for Financing Sustainable Growth presents a bold agenda that is looking to reshape the future of the financial sector. But because of the high level of complexity and the lack of a clear definition of what sustainability means, it is obvious that not all the pieces of the puzzle will fit together from the start, and that this is very much a work in progress.

In 2018, the European Union submitted an action plan that is intended to align the financial sector more closely with the goal of creating a sustainable economy. At the heart of the plan is a unified classification system – called a taxonomy – that in the future will be used to help identify which investments can be described as sustainable. So far, so sensible, but there is a major question mark hanging over which definition of sustainability the EU is applying. From the perspective of the financial sector, sustainable investment is already comprehensively covered by the ESG approach (Environment, Social, Governance). The EU action plan takes a similar view. However, the focus of the implementation plans falls very conspicuously on environmental and, in particular, climate-related aspects. This narrowing of the agenda raises the question as to whether the EU classification system does in fact give equal consideration to all the criteria of sustainable investment. And this is essential for it to function as intended. After all, only if a comprehensive definition of sustainability is being applied can investors be sure that their funds are being sustainably invested to the fullest extent. And this is precisely what counts for the majority of them. Indeed, market data and surveys show that most sustainability-minded investors are not exclusively looking for climate-specific financial products.

Significant clarification is still needed

The uncertainty as to the definition of sustainability is justifiably coming in for a lot of criticism. The EU classification system could provide clarity here. However, if the taxonomy is going to become a relevant guidance system for investors, it will need to cover not only all asset classes, but also – ideally – as many of the world’s investment regions as possible. The market for sustainable investments is a global one, after all. But it is still unclear whether and to what extent states and companies outside Europe will voluntarily provide the data that is required for the taxonomy. They will surely only do so if they deem the European investment market and its sustainability standards to be sufficiently important – which is by no means a given. Until and unless this is the case, the European classification system will have little meaning beyond its own region, and so, for the time being at least, should not be seen as a binding obligation but as a means of orientation.

Staying constructive

Because of the high level of complexity and the many unanswered questions regarding the EU action plan, pragmatism needs to be shown by all stakeholders. In order for the standards that are now being developed at EU level to allow sufficient scope for change and innovation, they cannot be allowed to get lost in the details. Asset managers and investors should act appropriately within their own sphere of responsibility and not wait for the action plan to be implemented. Clearly, all stakeholders will need to live with certain shortcomings and to identify them as critical action points. At the same time, however, the matter needs to be addressed in a constructive manner in order to find solutions that are effective and target-oriented.

Unless otherwise noted, all information and illustrations are as at 08 November 2019