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European Commission consults on investors and sustainability

The European Commission is consulting on on how institutional investors, asset managers and other service providers in the investment chain factor in sustainability (ESG) information and performance of companies or assets into investment decisions. The consultation will also gather information about possible obstacles to long-term, sustainable investment.

The Commission believes that growing the European Union’s economy needs to be based on developing a low carbon and climate resilient economy and well as in the promotion of environmentally and socially sustainable wealth creation. Its  Communication on Long-Term Financing of the European Economy [COM/2014/168 final] emphasised that one of the key features of long-term financing is that investors take longer-term aspects such as environmental, social, governance issues into account in their investment strategies. It further underlined the importance of ESG issues for the longer-term sustainable performance of companies and investors and announced further reflection on incentives for more sustainable investment. The Action Plan on building a Capital Markets Union [COM/2015/468 final] also reiterates the importance of ESG investments.

The Commission’s consultation comes as French institutional investors are getting to grips with implementing Article 173 of the wide-ranging French law, on Energy Transition for Green Growth.

United Nations Sustainable Financial System Inquiry

The United Nations Environment Programme’s (UNEP) Inquiry into the Design of a Sustainable Financial System published a report, France’s Financial (Eco)system in October 2015 examining French domestic policies and practices on sustainability. The report noted that the 2015 ETGG Law implemented two major new items on climate-related reporting.

First, it required both financial and non-financial companies to include their exposure to financial climate-related risks and their low-carbon strategy in their reports and communication with shareholders (Article L. 225-37 of the Commercial Code). Second, companies must disclose the impacts of their activities and products on climate change (Article L.225-102-1 of the Commercial Code).

Article 173 of the 2015 ETGG Law has extended this reporting requirement to institutional investors. In addition to reporting on the inclusion of ESG criteria in their investment strategies – with the climate- related dimension made more explicit – they are also required to assess how their investment strategies are consistent with and contribute to the low-carbon transition. For example the law requires institutional investors to “comply or explain” their approach to low-carbon strategies and alignment with national and international objectives.

The UNEP report said that one of the roles of the national low-carbon strategy mandated by Article 173 would be to create a reference framework within which French  financial institutions would be able  to compare their actions.

What do you think?