New EU sustainable finance initiative – strong on rhetoric, weak on regulation

‘Rhetoric doesn’t equal results’ says Global Witness in response to today’s European Commission’s Action Plan on Financing Sustainable Growth. The Plan’s ‘eye-catching rhetoric must be matched by a robust reality of regulation’ to fully ‘tackle the environmental and social harm caused by the financial sector’.

Today’s announcement from the European Commission to ‘reorient private capital to more sustainable investments’ is evidence that the EU is taking seriously its global commitments on climate (Paris Agreement) and sustainable development (2030 UN Goals). The Action Plan on Financing Sustainable Growth sends a clear message to investors managing pension funds, insurance, hedge funds and private equity in Europe: ‘Stop ignoring the financial sector’s harm to people and the planet.’

Rachel Owens, Head of EU Advocacy, Global Witness said ‘Today’s EU Action Plan has ambitious aspirations, but lacks robust regulations to tackle the environmental and social harm caused by the financial sector. Decades of damage prove that voluntary measures for Europe’s financial sector are not enough; the EU must regulate now.

The reality of the global footprint of Europe’s financial sector makes for grim reading: land grabbing and deforestation; contributing to climate change; and human rights violations. Self-regulation does little to stop investors financing projects that are socially or environmentally damaging. Yet EU regulation would immediately help families across Africa and Asia who are being forced off their land due to projects backed by money from European investors.

The Action Plan contains strong elements, which will improve the financial sector’s ability to assess, manage and mitigate climate change, environmental and social risks:

• A new classification system for climate change, and environmentally and socially sustainable activities
  
• Regulations explicitly requiring institutional investors and asset managers to integrate sustainability into decision-making
  

However, the reality of the Action Plan does not match its rhetoric. It depends too heavily on voluntary measures instead of regulation; it is only focused on climate change and ignores key social and governance risks; it lacks essential due diligence and accountability mechanisms. Addressing these elements will give the public and policy makers what they want. If not, the harm will go on.

Owens concluded, ‘Our research shows the ugly footprint caused by Europe’s financial industry. Yes we must reorient sufficient capital to put our economies on a more sustainable growth path. Yes we must protect the stability of the financial system from environmental and social risks. Yes we must foster more transparency and long-termism in our economy. And there’s just one way to do that. Through robust legislation that mandates financial industry due diligence to stop environmental, social and governance harm. The Action Plan’s eye-catching rhetoric must be matched by a robust reality.’