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BETTER FINANCE welcomes the Interim Report of the High-Level Expert Group on Sustainable Finance of the European Union, which highlights the need to “incorporate long-term and sustainable value creation”.
EU savers and sustainable finance are natural partners
Indeed, EU citizens as savers are by nature mostly long-term driven since 67% of their total assets are deployed in long-term investments[1] (versus only 37% for pension funds - despite their purely long-term horizon - and 11% for insurers) and their main saving goals are long-term: retirement, housing, children’s studies, transmission of wealth, etc. For these reasons EU citizens as savers have a great need for “sustainable finance” products.
Accordingly, sustainable finance needs to acquire and retain the trust of EU citizens, as they are the main source of long-term funding for the EU economy. This is a challenge given the current very low confidence of EU consumers in finance as a whole. However, EU citizens as long-term and pension savers so far remain absent from the EU policy work on sustainable finance. Indeed, this Report does not even mention savers and individual investors, and ignores the contribution and proposals (below) from BETTER FINANCE, who, at its own request, has been heard by the High-Level Expert Group.
What does sustainable finance mean for EU savers?
Sustainable finance suffers from a lack of clear, consistent and mutually agreed definitions. For EU savers it means:
- Finance that ensures “long-term and sustainable value creation” and pension adequacy (i.e. with the highest probability of providing decent real returns to EU citizens as savers and current or future pensioners over the long-term).
“Decent” returns are returns that at the very least do not destroy the value of their lifetime’s savings: i.e. net (after charges) real (after inflation) returns that are positive over the long-term, and sufficiently high to allow EU citizens to get an adequate pension replacement income. The advice to save early and amply – always put forward by the financial industry as well as Public Agencies as the solution – misses an even more crucial prerequisite for pension adequacy: returns. Our research[2] demonstrates that real net pension returns have too often been negative.
- Finance that first of all applies ESG criteria to its own activities, especially governance and transparency ones; and that is therefore exemplary in terms of compliance with EU consumer and investor protection rules, in particular information and disclosure ones.
Consumer protection warning
Indeed, sustainable finance products should not mislead long-term and pension savers about real long-term returns. Those that have repeatedly failed to deliver on their advertised objectives, and destroyed the real value of their clients’ savings, must not hide it from EU citizens, but on the contrary give “a fair and prominent indication of any relevant risks” and “not disguise, diminish or obscure important items, statements or warnings” (article 27.2 of the MiFID I implementation directive). These products should also really do what they claim, in particular regarding “active” management claims as well as those claiming to make a difference by applying ESG criteria to their investments.
Unfortunately BETTER FINANCE has found evidence (see annex) that some investment products labelled as “socially responsible” don’t meet these basic requirements, quite the contrary.
BETTER FINANCE key recommendations to the High-Level Expert Group
- Ensure sustainable finance is not seen as just a marketing gimmick and come up with independently validated common definitions and standards for “SF”, “ESG”, “SRI”, “2° investing”, “green” bonds, etc. at least at the EU level, preferably at the UN one.
- Recognise long-term and pension savers as major stakeholders in sustainable finance, who are not only there to pay the fees and bear the risks but also to get a fair share of the long-term rewards and benefit from fully transparent information including on risks, failures and weaknesses.
- Put an end to short-termism, which means the financial industry and EU regulators must adjust their goals, metrics and disclosure requirements to the mostly long-term horizon of EU savers and investors.
- It also means that Professional investors must dramatically increase their holdings in long-term assets.
- Measure and clearly inform EU savers about the impact of applying ESG criteria on the actual long-term real performance: simply comparing long-term actual performance with corresponding mainstream capital markets’ benchmarks, and avoiding using newly created ESG specific benchmarks that will not address this issue, will only add to the confusion and complexity for EU savers.
- Be the most compliant with EU rules on fair, clear and non-misleading information (see annex on BF research findings on SRI-labelled products); checking this exemplary compliance with investor and consumer protection rules should a fortiori be a key requisite for granting any ESG label.
