In October 2015, the European Commission launched its Capital Markets Union (CMU) initiative.
It was set up to provide new sources of funding for business, help increase options for savers and make the economy more resilient. To deliver this overarching ambition, the CMU has five sub-objectives. One of these is to ensure “an appropriate regulatory environment for long term, sustainable investment and financing of Europe’s infrastructure”. Two years on from the CMU’s launch, this briefing paper assesses progress made over the past year in delivering this objective.
The briefing paper assesses the progress made in delivering sustainable investment through the CMU by scoring progress made against what E3G regards as the core principles necessary to achieve this. They are: delivering sustainable infrastructure; supporting sustainable development; and improving understanding of climate and other environmental, social and governance (ESG)-related risks. The CMU is given an updated ‘credit rating’ based on the actions taken so far and those planned during final 18-20 months of this initiative.
Last year, E3G gave the CMU a ‘BB’ rating for sustainability. It was concluded that the focus on delivery of the sustainability objectives had been inadequate and that additional policies would be required to boost sustainable investment.
This year the score is improved. The CMU is given a ‘BBB’ rating reflecting three important changes:
- Eurostat (the Statistical Office of European Commission) published an updated guidance note setting out how to record energy performance contracts (EPCs) in national accounts. This guidance removes the requirement to record EPCs in national accounts where the private sector provides financing and takes on the operational and financial risk.
- The European Commission has taken a first step to integrate sustainable finance considerations into financial supervision through the proposals to strengthening the powers of the European Supervisory Authorities (ESAs). The proposals specifically require the ESAs to take into account ESG factors arising within the framework of their mandate.
- The European Commission launched a public consultation on institutional investors' and asset managers' duties regarding sustainability. This is a direct response to a recommendation of the High-Level Expert Group on sustainable finance (HLEG) that investors have an obligation to include considerations of sustainability as part of their duty to their beneficiaries and clients.
It is E3G’s view that there is more work to be done. Two important opportunities have been missed – regarding the integration of sustainability considerations into the proposal to amend the Capital Requirements Directive and Regulation (‘CRD-IV package’) and the proposal for a pan-European pension product (PEPP).
That said, the CMU as it currently stands has been awarded a ‘positive’ outlook. This is based on the fact the European Commission stated in its Mid-Term Review of the Capital Markets Union Action Plan (CMU Mid-Term Review) it will:
- Decide, by Q1 2018, on the concrete follow up to the HLEG’s recommendations.
- Set in motion work to prepare measures to improve disclosure and better integrate sustainability/ESG in rating methodologies and supervisory processes, as well as in the investment mandates of institutional investors and asset managers.
- Develop an approach for taking sustainability considerations into account in upcoming legislative reviews of financial legislation.
- Report on whether the accounting treatment of equity instruments in IFRS 9 is sufficiently conducive to long term financing by Q2 2018.
- Amend the prudential treatment of private equity and privately placed debt in Solvency II by Q3 2018.
- Assess the drivers of equity investments by insurance companies and pension funds by Q4 2018.
These commitments have the potential to create a step change in shifting the European economy onto a more sustainable footing through a deep re-engineering of the financial system that places sustainability considerations at its core.