Environmental, social, and governance (ESG) and sustainable finance is hitting the big leagues. How do we know? Because the European Investment Bank (EIB), one of the largest lenders in the world, recently announced their plan to stop financing any projects relating to fossil fuels by the end of 2021. This new policy means that the EIB will curb its support for oil, coal, and natural gas infrastructure projects. The EIB’s announcement represents the latest – and arguably largest – development by a financial player to create a more sustainable future. In the banking and asset management space, it appears many industry participants are following suit with product developers, policymakers, and regulators elevating ESG themes to the forefront.
Why is the EIB announcement so significant?
The EIB is currently the biggest public multilateral lender in the world. Since 2013, the EIB has funded €13.4 billion of fossil fuel projects, with about €2 billion coming in the last year. With this policy move confirmed, the incoming European Commission President dubbed the Luxembourg-based bank the world’s first “climate bank.” In the announcement, the bank said that it wants to “set the standard” for what it meant for banks to be aligned with the Paris Climate Agreement. In some ways, the move is a capital market manifestation of the EU’s ambitious stated aim to be carbon-neutral by 2050.
How does the EIB’s decision impact asset managers?
Although the EIB decision doesn’t have material direct impacts to global asset managers, they would do well to pay heed. The move impacts fossil fuel projects themselves and companies in that market segment in Europe and beyond. There is increased evidence of fossil fuel divestments across the markets, a trend which may continue for fear of such companies holding stranded assets as society transitions from fossil fuels to sustainably sourced energy. Their transition plans will be important given the growing trend towards sustainability.
Indirectly, the move once more shows how central to EU policymaking ESG factors and sustainability really are. The foundational regulations that underpin asset management in the EU (UCITS, AIFMD, and MIFID II) are enshrining sustainability to their core.
But implementing ESG regulation has been a bit bumpy, hasn’t it?
Yes, they are moving ahead but not without some challenges.
As a recap, the EU Action Plan on Sustainable Finance (the “Plan”) is an ambitious policy plan to tilt banks and asset managers towards mitigation of climate change. The Plan impacts all UCITS management companies, AIFMs, and MiFID firms through integration of various sustainability requirements. The current industry focus is on the Disclosure Regulation component which mandates certain sustainability disclosures such as policy and procedures including investment due diligence policy, mandatory disclosures and remuneration provisions. These disclosure rules add to the EU Taxonomy and Benchmark elements of the Plan already agreed.
The Disclosures Regulation does not have universal support and industry associations are urging a delay to implementation. Some have voiced concern that the timing of implementation is too aggressive considering there is not yet final agreement on taxonomy. Under EU law, the Disclosure Regulations become effective 15 months from the date of publication in the Official Journal. Regulators could publish the rules any day now, putting implementation around 2021. But without final political agreement on taxonomy, firms may need to start planning without having the final definitions.
Is sustainable finance solely an EU policy focus area?
While some of the loudest voices in terms of sustainability policy change come from Europe, the debate and focus are truly global. Earlier this month, US SEC Chairman Jay Clayton stated that he had a “very constructive meeting” on ESG with Valdis Dombrovskis (EU Commissioner for Financial Services).
Chairman Clayton spoke directly to the difficulty of developing appropriate disclosures given the complexity of reconciling disparate definitional schemes. He also said, “in the areas of ‘E’ and ‘S’ and ‘G,’ in particular, the approach to investment analysis appears to vary widely, in some cases incorporating objectives other than investment performance over a particular time frame or frames.” While acknowledging the issue is complex, the SEC is not shying away and will continue to assess how they can move the market towards more “decision-useful” information.
This really does show that ESG is a global phenomenon. While the industry and regulators continue to strive for agreed standards and a common language, what is not in doubt is that the topic is going to remain very high on the agenda of governments, policymakers, and regulators for the foreseeable future.
While the formal rules and standards on the integration of ESG and sustainability in asset management remain elusive, and in some quarters divisive, the continued rise in its importance for investment products across the globe is indisputable. We will see more and more policy decisions similar to the EIBs, we will continue to see a global push to mitigate climate change, and we will see regulators take action to foster a more sustainable global investment model. 2020 is almost upon us and the course and direction of travel for sustainable investment has been well and truly set.