Sustainable finance in the EU: Risks and opportunities for business

Friday 27 October, 2017

Sustainable finance is the new must-do for businesses operating in Europe. Long-term stabilisation of the EU financial system implies overt business sustainability as well as a subtle transformation of the financial drivers that underpin a progressive inclusive economy.

Driven by the UN and its Sustainable Development Goals (SDGs), there are a multitude of initiatives at every level and in every sector to re-engineer finance regulation and policy to be more sustainable by integrating environmental, social and governance factors (ESG). Within the EU Commission, the High Level Expert Group (HLEG) on sustainable finance has been discussing how to embed sustainability across EU financial legislation since January 2017. Their consensus will inform the Commission’s EU Action Plan on Sustainable Finance to be published in 2018.

Weber Shandwick recently hosted a high-level round table to shed light on the HLEG’s progress, discuss how to reallocate capital towards sustainable investment in Europe, and evaluate the risks and opportunities for business. Several key themes emerged that will have significant implications for businesses as they consider what sustainability means for their future:

Increased standardisation. A priority is to establish a common EU definition of sustainable assets, meaning existing classifications will change. One idea under discussion is to develop an EU classification system for green assets. Other work streams focus on strengthening business ESG reporting requirements; stipulating that the fiduciary responsibility of investment management institutions includes intersectional business sustainability, for example, integrating ESG factors across the entire investment chain; and assessing how credit rating agencies embed long-term sustainability in their analyses. Companies must understand and prepare for such shifts.

Increased transparency. Changing reporting standards will force firms to be more transparent. Whether money is from public or private sources, investors and regulators will assess not only production and profit margins, but also how ‘sustainable’ business models are for the long-term. Some sectors will face major challenges to effectively measure sustainability, due to difficulties in setting parameters and defining metrics for what is ‘green’. What’s more, there is insufficient comparable data to establish fair financial benchmarks and avoid greenwashing. Questions as to who should take the first step in defining such metrics add to the challenge. Companies should consider what a sustainable business model looks like to ensure they can thrive in a more transparent market.

Increased reflection. With increased transparency, companies will need to reflect on whether any of their operating practices or procedures need to shift. Key areas to consider include the disclosure of non-financial information, such as factoring in climate risk in decision-making, re-organising internal supply chains and corporate governance frameworks, and potential impacts of upcoming reviews of EU accounting and banking rules. Ongoing debates, if implemented as policy, could necessitate deep changes in business practice. Of note, part of the banking industry is calling for additional capital surcharges for assets with ‘higher’ environmental and social risks and for assets that do not comply with the SDGs. For the energy sector, debates abound on whether penalties should be levied for brown investments and how to cost environmental externalities.

This wide-ranging debate will continue into next year, with many questions still to be answered. The European Commission reiterated that any upcoming policy or legislation in this field will involve stakeholder consultation or impact assessments before considering roll out to avoid penalising European companies. Firms will thus need to keep up to date on the many pieces of proposed legislation that emerge and proactively engage to ensure their long-term financial (and social and environmental) sustainability.

For further information, please contact Ursula Woodburn, uwoodburn@webershandwick.com.