ESG OUTLOOK (part 4)

A slowdown in regulatory progress may jeopardise international ambitions

by Ophélie Mortier,
Sustainable & Responsible Investment Strategist at DPAM


Should we fear that the postponements of major meetings such as COP 26 will slow down our recent advances in responsible investments?

It is important to distinguish between, on the one hand, progress in regulating sustainable and responsible investment, and on the other, progress in green or social regulation, which is more directed at business and government. Similarly, we must make a distinction between European and international ambitions.

The future of the international efforts to combat climate change is not promising. As noted in our previous article ESG Outlook (part 3), China has backtracked on its environmental commitments in order to fast-track its recovery path. In the United States, progress will probably depend more on the motivation of the federal states than on the ambitions of its head of state. As for Europe, the picture is rather mixed. Admittedly, it has issued several statements in support of keeping the Green Deal at the heart of the recovery. However, the European Central Bank’s support and its bond-buyback strategy have been eerily reminiscent of Mr. Draghi’s programmes, which fly directly in the face of the European Union’s environmental and climate objectives.

With regard to sustainable investment, the European Commission’s taxonomy is still well established. In fact, the latest regulation on sustainability-related disclosures in the financial services sector (“The Sustainable Disclosure Regulation”) will heavily impact the roll-out of ESG integration.

The Green Pact, at the heart of the European Union’s economic recovery

On 28 November 2019, the European Parliament declared a climate emergency. This declaration was followed in December 2019 by the European Council’s notes on how to achieve a climate-neutral European Union by 2050. On November 14, 2019, the European Investment Bank published its latest investment strategy, which has sought to align its financing activities with the objectives of the Paris Agreement as of 2020. As such, the investment bank set out to end its investments in fossil fuel projects as of 2021. We must ensure that the European Central Bank’s support of the economic recovery does not cancel out the sustainable goals of the European Investment Bank. We want to avoid a situation where the investment bank excludes unsustainable economic practices and activities, while the central bank simultaneously subsidises the very same activities to promote an economic recovery.

At the level of the European Commission, the Green Deal aims to achieve climate neutrality by 2050, and pushes the EU to increase its climate ambitions. In this context, the Commission has issued its Renewed Sustainable Finance Strategy as an ambitious follow-up to the 10 steps of the 2018 Action Plan for Sustainable Finance and the partial implementation of its Green Deal.

The details of the Green Deal are still largely unknown. However, as we previously highlighted in our article on “The Green Deal”, it will significantly impact all economic sectors. In short, its four main points focus on:

    • Setting an appropriate carbon price and an adjustment mechanism for imported and exported emissions;

    • Adopting a European climate law, which aims for climate neutrality by 2050;

    • Implementing increasingly ambitious decarbonisation targets for 2030 (i.e. the Commission is raising the 40% reduction in carbon emissions from 1990 levels to a minimum of 50-55%);

    • Promoting a circular economy, in particular the “Farm to Fork” project for the agri-food sector;


We will need significant investments to reach these objectives. In addition, we must also invest in the professional reconversion of certain sub-sectors or activities to ensure a just transition. It is clear that the public sector cannot fully meet these financial requirements, especially after the current crisis. Moreover, these investments must be made within the next 5 to 10 years, otherwise the accumulated delay will only aggravate the situation and increase the necessary funding.

Regulations for ESG integration

The financing needs of the energy transition are significant. As the European Union’s climate ambitions gradually increase, so will the financing needs. As such, the public sector cannot meet them alone. The COVID-19 crisis has shown the major social consequences of climate change and biodiversity issues. It also demonstrates why -now more than ever- sustainable and responsible investment needs a clear and common language to support its structural growth.

All market players recognise the complexity of the strategies, the lack of frameworks and standards, and the resulting confusion for investors.

Improved corporate reporting, which includes relevant and consistent non-financial metrics, is a key step in the evolution of ESG integration. Today, several initiatives, such as the SASB, GRI or the TCFD recommendations are trying to tackle this issue. While these initiatives can help responsible finance practitioners, their diversity (i.e. their different standards and approaches) only add to the confusion for investors. Can the European Commission’s Taxonomy address this issue?

Mr Junckers’ Commission initiative has been heavily criticised, and rightly so. Although it denies distinguishing between ‘green’ and ‘non-green’, it nevertheless provides companies with a benchmark of sorts. This indicator then allows companies to measure their “eligibility” and “conformity” with green criteria as defined by the Taxonomy. As a result, companies will feel urged to take measures to optimise their ‘taxonomy-compliance’ score, since this arguably attracts superior investment flows. We can draw a parallel with the carbon footprint situation. The investment community unanimously recognises the inherent weaknesses related to the quantification of companies’ carbon emissions. The pressure to calculate said carbon footprint – notably driven by regulations such as Article 173 in France – has led, on the one hand, to low-carbon indices (now also regulated at the European level) and, on the other hand, to optimisation strategies to decarbonise portfolios. Similarly, we expect that approaches to maximise one’s European Taxonomy eligibility score will emerge, and with it, bring their own advantages and shortcomings.

The Green Taxonomy does not exclusively target green products. It touches on all financial solutions. These products have to make sure that they align with the Taxonomy’s two environmental objectives (i.e. adaptation and mitigation of climate change), but also need to take into account their potentially negative impact vis-à-vis the commission’s other upcoming environmental objectives (pollution, water, etc.).

The Taxonomy can even impact corporate governance and strategy by questioning certain business activities. Additionally, it can potentially influence future mergers and acquisitions. Companies could start to focus on acquiring activities that are highly aligned with the taxonomy so as to rapidly improve their alignment rate through organic growth.

This Taxonomy also supports the Renewed Sustainable Finance Strategy, which aims to:

    • Setting an appropriate carbon price and an adjustment mechanism for imported and exported emissions;

    • Adopting a European climate law, which aims for climate neutrality by 2050;

    • Implementing increasingly ambitious decarbonisation targets for 2030 (i.e. the Commission is raising the 40% reduction in carbon emissions from 1990 levels to a minimum of 50-55%);

    • Promoting a circular economy, in particular the “Farm to Fork” project for the agri-food sector;


Reinforced by the Directive on Sustainability Disclosure in Financial Services, this strategy has a significant impact on the entire investment value chain, both at operational and support levels.

Upcoming regulations, which will likely appear in the near future, aim to reduce green-washing and direct investment flows towards sustainable and green projects. However, they could also lead to excessive reporting and an administrative overload for all stakeholders. This autumn, we should look closely at the expected results of the market study launched by the European Commission. The study works towards greater transparency in the ‘sustainability assessment tools’ market with suppliers and intermediaries.

A final word

As we have stressed throughout our four articles on the ESG outlook, the trend towards sustainable and responsible investment is structural. The transition towards a more sustainable financial system, a low-carbon economy and inclusive growth has been underway for several years now. Regulation and the health crisis have confirmed both their resilience to volatility, and the sustainability of their performance.

It is high time to realise our ambitions. Even if they have been ever-so-slightly shaken by the pandemic, they remain strong (at least at the European level).

At a time when climate and social emergencies call for close international cooperation, the pandemic has highlighted our complete lack thereof. The need for cooperation is not only an international requirement. It is a key necessity to all stakeholders, be they governments, central banks, companies, investors or shareholders.

Government authorities have a duty to support and revive the economy. However, they also have to prepare for the future: i.e. the sustainability of economic growth and development, but also the future of the population. This starts with investment in education. Governments need to make sure that the sector does not continuously fall victim to budget cuts, and that it also suitably addresses current and upcoming challenges.
Next, we have to emphasise investments in training to ensure individuals are properly prepared to facilitate a fair and equitable energy transition.

In the end, this is what this type of investments is all about. It is much more than merely reporting on a myriad of impact indicators in the name of transparency (even if there is obviously a dire need for a common reporting language and mutual standards). Indeed, sustainable and responsible investments are about financing entities that have embraced the concept of stakeholder governance, and have clearly identified the risks and opportunities of current environmental, social and governance issues.


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