Whereas BETTER FINANCE welcomes the report of the European Commission’s High-Level Expert Group (HLEG) on Sustainable Finance as a step in the right direction to promote a cleaner and fairer economy, it is also disappointed in the fact that the report essentially fails to address information and governance issues for sustainable finance products.
BETTER FINANCE and EU citizens as pension savers and individual investors, by their very nature, are strong supporters of ‘sustainable finance’: they are parents and citizens who want to leave a greener and better planet for their children, whose main saving goals - such as retirement, housing and transmission of wealth - are long-term oriented and need a sustainable economy and environment.
Whereas the final HLEG report rightly widens the scope of sustainable finance to include social and governance issues besides criteria on environment and climate change, it fails to include any reference to the most basic of requirements for sustainable finance, i.e. fair, transparent, clear and non-misleading investor information. This is unfortunate since BETTTER FINANCE had been heard by the Group at its request and had also publicly stressed this issue at the time of the Interim Report.
The report does little to improve the trust of EU citizens as savers and investors. For EU citizens, the concept of sustainable finance should translate into products that are exemplary in complying with EU investor protection rules. BETTER FINANCE would support the idea of an EU sustainable finance product label, as long as such compliance be a key requisite for granting any ESG or SRI label.
Unfortunately, as already flagged in its response to the HLEG Interim Report in July 2017, BETTER FINANCE research reveals that some products already labelled as “sustainable” by Public Authorities do not comply with EU investor protection rules (see annex). Therefore any design of an EU-level “label” should learn from experience and not repeat these serious flaws.
It is essential that ESG-based finance be trustworthy and reliable. What should be avoided at all cost is for ESG criteria to be misused in order to circumvent investor protection rules or, worse, engage in falsely active management. Also in this respect the final HLEG report ignored the advice from BETTER FINANCE to avoid using ESG-specific benchmarks with individual investors, since there are almost as many definitions of sustainable investments as there are investors. This can only create further complexity and lead to confusion and misleading information. Sustainable finance providers should instead ensure that EU savers are clearly informed about the impact of using ESG criteria on their actual long-term real performance by benchmarking it to that of a corresponding, far better known and simpler mainstream capital market benchmark. After all, the performance of sustainable finance investments should prove to be better in the long run.
Regarding these “mainstream” benchmarks, we are happy to note that the HLEG is also recommending the use of broad equity indices[1] instead of the very narrow ones typically referred to by the industry, by the Authorities and by the media. This has been a longstanding demand from BETTER FINANCE within the European CMU initiative[2]. There are in fact broader European equity indices than the one mentioned by the HLEG report, that enable savers to invest more into listed European SMEs in a diversified way, like the STOXX All Europe Total Market Index (nearly 1500 stocks instead of the 50 in the much more widely known and used STOXX Europe 50).
Guillaume Prache, Managing Director of BETTER FINANCE, said that “sustainable finance must refer to retail financial products that indeed ensure “long-term and sustainable value creation”, as stressed by the Commission’s High Level Group, and that applies ESG criteria, especially governance and transparency ones, to its own practices. Such a sustainable finance would therefore be exemplary in terms of compliance with EU consumer and investor protection rules, in particular information and disclosure ones.”
