European Commission launches ESG fiduciary duty consult amid COP23

The European Commission launched a public consultation yesterday (Monday) on how ESG factors could be integrated into the fiduciary duties of asset managers and institutional investors, as Valdis Dombrovskis spoke of the importance of private capital in achieving climate targets at COP23.

In introductory remarks at the 23rd session of the United Nations Conference of the Parties (COP23) in Bonn yesterday (Monday), Dombrovskis (pictured), vice president, European Commission, highlighted the importance role private capital must play if climate targets are to be met – with an estimated Eu180bn in additional yearly energy investments required in Europe alone.

“The good news is that this is still within the vast capacity of our financial system,” he said. “Together, asset managers and institutional investors manage about Eu35tr in assets in Europe.

“These private investors now have unprecedented opportunities to capitalise on the wide-spread need for green and long term infrastructure. And they are already starting to seize these opportunities.”

Dombrovskis noted, as an example, that the Climate Bonds Initiative predicts global green bonds issuance will reach Eu131bn this year – almost double last year’s total.

“So we are heading in the right direction, but the problem is that we are not moving fast enough,” he said. “Our task is therefore to provide the trust in green products needed for investors to fund the transition to the low-carbon economy.

“For this, we need to make sure investors get the clear and reliable information they need to avoid products that are merely green-washing. We need to improve access for retail investors. And we need to help institutional investors direct their capital towards a long term impact.”

The Commission is currently exploring action in these areas, Dombrovskis said, including a classification system for green assets and a European standard and label for green bonds and other green financial products.

“In the long-run, the goal should be to establish EU labels and quality standards for all sustainable assets,” he added.

Dombrovskis also noted that a high-level expert group (HLEG) on sustainable finance is due to publish final proposals for reforming regulations and policies in January, and said the Commission “will act quickly on their recommendations”.

Fiduciary consult to enhance ‘magic triangle’

One early recommendation put forward in an interim report from the HLEG in July was that the Commission clarify that the fiduciary duties of institutional investors and asset managers explicitly integrate material environmental, social and governance (ESG) factors and long term sustainability.

The Commission is exploring ways to better integrate sustainability considerations in the investment mandates of asset managers and institutional investors, Dombrovskis said, and as part of this has decided to start work on an impact assessment to assess whether and how a clarification of the duties of institutional investors and asset managers in terms of sustainability could contribute to a more efficient allocation of capital, and to sustainable and inclusive growth.

This impact assessment will be informed by a public consultation, announced by Dombrovskis and launched yesterday.

“We believe that taking into account sustainability risks would allow these investors to allocate capital more efficiently,” he said. “I invite you all to send in your contributions.”

The consultation, which is open to all citizens and organisations, takes the form of a questionnaire, and seeks participants’ opinions and insights on subjects including:

  • What sustainability factors relevant investment entities should consider when investing, if any;
  • The current level of integration of sustainability factors in investors’ decisions and the challenges of integrating such factors; and,
  • Which stakeholder groups would incur costs and which would benefit from integrating sustainability factors within decision-making by relevant investment entities.

The consultation will close on 22 January.

Fiona Reynolds, managing director of the Principles for Responsible Investment (PRI), congratulated the European Commission for launching the consultation and recognising the importance of this issue, adding that she looks forward to working with PRI signatories across the EU to provide evidence.

“Leading investors know that ESG issues are fundamental to fulfilling their duties, but the law is lagging behind,” she said. “We need a level playing field for all investors.”

PRI signatories gave their backing to the consultation.

“Investors’ duties are a major lever to firmly anchor sustainability considerations in the awareness of the financial sector as well as in the conduct and behaviour of decision-makers and regulators,” said Michael Schmidt, member of the executive board and managing director of Deka Investment GmbH. “Implementing investor duty principles is not a box-ticking exercise but assuming responsibility in a broader sense.

“It means to enhance the ‘magical triangle’ of investing (return, security, liquidity) by adding sustainability as a fourth dimension.”

Photo: Valdis Dombrovskis/Twitter