Commission must double efforts towards a sustainable financial system

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.com PLC.

Analysts are worried transaction taxes could curb the benefits of capital markets union. [Shutterstock]

Robust and binding criteria are needed to build sustainable capital markets or we risk that both national legislators and financial investors simply ignore their investment’s impact, or revert to greenwashing, writes Anne van Schaik.

Anne van Schaik is sustainable finance campaigner for Friends of the Earth Europe

The European Commission is taking steps towards a more sustainable financial system in Europe, but must double its efforts to create a truly resilient system that Europe needs.

The European Commission published its review of the Capital Markets Union (CMU) on Thursday (8 June). Hailed as Europe’s response to the financial crisis, the CMU promised safer and more sustainable investment choices for European citizens and small and medium businesses. In its Mid-Term Review, there is a notable focus on sustainable economies, and recognition that a deep reengineering of Europe’s financial systems is necessary to prevent investments fuelling land-grabbing, human rights abuses and environmental crimes. But, recognition alone will not solve these problems, nor instigate that deep structural change.

If the EU wants to contribute to a truly resilient and sustainable financial system, a good first step is an ambitious strategy with a work-plan to put words into action so that our financial system and investments deliver positive results for the people and the planet.

Clarity on the fiduciary duties of asset owners and asset managers is needed, and the inclusion of Environmental, Social and Governance (ESG) considerations into decision-making will ensure that sustainability is central to corporate governance. Sustainability considerations must be the starting point for upcoming reviews of financial legislation.

We need robust and binding criteria for the ESG considerations above, or risk both national legislators and financial investors simply ignoring their investment’s impact, or reverting to greenwash. Current ESG criteria in financial legislation are consistently side-lined. In the Shareholder Rights Directive the ESG are included, but only on a ‘comply or explain’ basis. This approach leaves huge loopholes.

We can’t rely on investors to do the right thing: self-regulatory measures and policies have failed. Instead we need strong regulation that creates a policy signal and prevents these financiers from providing financial services to companies that continue to engage in land-grabbing, human rights violations, environmental degradation and projects that contribute to climate change. We need a legislative framework that obliges the financial sector to acknowledge ESG harms as risks and base their investment decisions on preventing these risks.

The Commission can start today to ensure that future legislative proposals, like the personal pensions proposal and alternative investment funds, are aligned in terms of environmental, social and governance issues – including having clear and mandatory obligations for these issues.

The Commission is right when it says that a deep reengineering of our financial systems is needed – but we’re not going to get there with words alone. It’s time for the European Commission to double its efforts, with full backing from member states, to push for the truly resilient and sustainable financial system that Europe needs.