Interview: Olivier Guersent, Director-General for Financial Stability, Services and Capital Markets Union, European Commission
Jan 17, 2018
Climate Action caught up with Olivier Guersent on the work the European Commission is doing to encourage sustainable investment and the transition to a low carbon economy, as well as his participation in the Sustainable Investment Forum Europe.
1. Can you explain the work and the role of the European Commission in terms of sustainable investment, and what policies or initiatives are already in place?
The Paris Agreement charted a new course in the global climate effort. The European Union pledged to take the lead in implementing this historic agreement. The European Union is committed to reducing carbon emissions by 40 percent by 2030 (compared to CO2 emission levels in 1990) as part of its own 2030 Energy and Climate goals. Estimates on investment needs to make the European economy more sustainable and bring it in line with the 2° pathway agreed in Paris amount to additional low-carbon investments of around €180 billion per annum over the next 2-3 decades. This is an enormous investment and finance challenge.
The role of the Commission, in close cooperation with European Members States and the European Parliament, is to develop an overarching EU strategy on sustainable finance that allows the EU to deliver on its policy goals and facilitate the real economy investments needed.
Investments will have to be made notably by the private sector, and we need to mobilise private finance and capital markets to support this transition to a low-carbon, more sustainable economy.
The financial sector can contribute to mitigating risks posed by climate change via redirecting financial flows towards environmental and sustainable economic activities. However, to support this process, we need to put in place the right conditions and incentives, such as: a greater trust in 'green' financial products, and a greater investor consciousness of long‑term risks and opportunities.
The European Commission is playing its part in supporting developments towards integrating sustainability in financial markets and has already taken measures in that respect:
- Certain large companies – our estimate is up to 6000 – are required from 2018 to disclose material information including environmental, social and employee matters, respect of human rights, corruption and bribery matters, and diversity in the boards of directors. The related non-binding guidelines of non-financial reporting are scheduled to be adopted by the end of this month.
- The recently adopted IORP2 Directive will require occupational pension funds to consider taking into account Environmental, Social and Governance (ESG) factors in their investment decisions.
- The revised Shareholders Rights Directive will incentivise investors to better align their investment strategies and mandates with their long-term liabilities.
The Capital Markets Union (CMU) mid-term review of June 2017 included measures which demonstrate the Commission's strong commitment to reinforce its sustainable finance agenda. Specific CMU Actions include:
- Clarification that "fiduciary duties" of asset owners and asset managers includes integrating ESG considerations into decision-making throughout the investment chain. The European Commission launched a public consultation for this purpose in early November 2017 which will end on 20 January 2018.
- Promotion of better integration of ESG performance in issuer ratings and key market benchmarks.
- Taking into account sustainability considerations in upcoming legislative reviews of financial legislation.
The European Commission, in its legislative package adopted on September 2017, proposed to give a clear mandate on sustainability issues to the three European Supervisory Authorities (ESAs) requiring the European Supervisory Authorities explicitly to take into account environmental, social and governance factors arising within the framework of their mandate. This will enable the ESAs to monitor how financial institutions identify, report, and address environmental, social and governance risks, thereby enhancing financial viability and stability. The Commission hopes that these new rules will be adopted as rapidly as possible.
And last but certainly not least, the European Commission established a High-Level Expert Group on sustainable finance at the end of 2016 which will deliver its Final Report by the end of January 2018. We expect concrete policy recommendations to the way forward in a number of areas to which we will respond with an Action Plan on sustainable finance by March 2018.
2. What do you see as the key priorities for the European Commission to encourage sustainable investment and the transition to a low carbon economy?
Our work is on-going in three main directions:
- First, we are working on integrating sustainability factors into investment mandates, which are duties that asset managers and institutional investors have towards those whose money they manage.
- Second, we are striving to create an EU classification system for 'green' and sustainable activities and investments, which is key to building a common understanding of what is considered 'green' and 'sustainable'. Such classification would be crucial to increase transparency in the market and form the basis for future EU standards for Green Bonds or labels for Green Investment Funds as well as for any regulatory measure related to green investments and finance.
- Furthermore, we are considering which kind of green investments could be supported through our financial, regulatory framework. One area which would merit closer investigation could be energy-efficient mortgages.
- These priorities are in line with the findings of the High-Level Expert Group in its Interim Report of July 2017 which mentioned the following areas as important: Developing sustainability taxonomy; European standards and labels; integrating ESG factors into the investment culture across the investment chain and embedding sustainability systematically in EU financial services legislation.
3. What are some of the key challenges to scaling up low carbon investment in Europe?
One of the key challenges to increasing low-carbon investments is the capacity to prepare and develop investment projects that are economically viable and can attract private capital. We are aware of the investment needs in the European Union to reach our own environmental and sustainability goals. Investments in low-carbon projects and applications are very divers comprising large-scale infrastructures, new green technologies or energy-efficiency investments by corporates and private households.
All those investments are necessary to contribute to achieving our European Union environmental and sustainability goals, and many of such investments may have a positive impact on our competitiveness at the same time through applying innovative technologies, enhancing efficiency and reducing costs. However, given the volume of investments and their diverse nature, we need to mobilise significant private resources and use our public budgets, at EU and national level, in the most effective way to unlock private investments and finance.
Policy setting and coherent implementation is another important factor to scale up low-carbon investments. Achieving the European Union's climate and environmental targets by 2030 and even beyond requires stable long-term policy frameworks and predictable conditions for those who invest in low-carbon projects and provide finance to them. We need to make sure that such long-term frameworks are in place at European and national level.
4. What are the main rationales for institutional investors and asset managers taking ESG risks and opportunities into account in their investment decisions?
Institutional investors like pension funds or insurance companies usually pursue a long-term investment strategy that also reflects their long-term liabilities. Environmental, social and governance risks can be significant material risk factors that need to be taken into account when deciding on investments in assets such as infrastructure or companies in particular sectors like energy or transport. Apart from economic and financial performance reasons, there is also a reputational dimension of ESG when selecting investment opportunities.
Therefore, institutional investors and asset managers with long-term investment horizons are increasingly building in ESG factors – both on the risk and opportunity side – in their investment strategy.
5.You will be speaking at the first Sustainable Investment Forum Europe, what do you think can be achieved in terms of outcomes of the Forum?
We have experienced, particularly over the past 2-3 years that investors, financiers, policy makers, supervisors and civil society – in the European Union but also elsewhere – are increasingly sensitive to climate-related, environmental and broader sustainability issues. The most recent important gathering of all relevant actors at the Paris One Planet summit in December 2017 underlined this sensitivity and willingness to work together for a low-carbon, more sustainable economy.
An event like the Sustainable Investment Forum Europe is an excellent opportunity to reinforce the cooperation of all relevant stakeholders and underline the urgency for concrete measures that support sustainable investments and mobilise the necessary finance for them.
Olivier Guersent will be taking part in the on-stage interview "Article 173 in France: what does it mean for the investment community?" at the Sustainable Investment Forum Europe on the 13th of March in Paris, France. To learn more about the event and how to register click here.