EU sustainability expert group backs integrated reporting

An interim report from the EU high level expert group on sustainable finance has highlighted the need to prioritise the integration of environmental, social and governance (ESG) factors into financial decision making and backed a shift to integrated reporting

The report argues that ESG reporting requirements should be strengthened and advocates the introduction of a ‘sustainability test’ for EU financial legislation. The test would link government spending, bank lending, corporate investment and asset level data on capital investments.

The report states: ‘Progress has been made in some member states on mapping “climate finance” landscapes, which track sources and financial instruments directing capital towards investments with climate mitigation or adaptation outcomes.

‘This could be extended across the EU and broadened to include all sustainable development priorities, the potential result being a fully functional and coherent EU sustainable finance statistical system.’

The expert group also argues that current EU policy frameworks and market behaviour continue to favour a focus on liquid assets, short-term financial returns and instruments, as well low yielding debt in times of low interest rates.

By contrast, investment and lending in infrastructure (equity and debt), small-cap indices, SMEs, securitisation, private equity and real assets is more limited. Yet these assets are often the most critical for the transition to sustainable development.

The report states: ‘The financial system and policy framework is focused on securing risk-adjusted returns, but the understanding of value often remains constrained to conventional elements rather than considering powerful intangible factors, including the ESG dimensions of performance and impact.

‘Yet these factors are real and increasingly impinge on the financial risks facing individual assets as well as the system as a whole.

The expert group’s recommendations include agreeing an EU classification system of ‘sustainable’ assets, which it says would boost investor confidence and give firms a better understanding of which assets qualify as sustainable investments. A European standard for green bonds, in particular, would help the EU green bond market reach its full potential, it claims.

The group in its report states: ‘Firms typically report on their financial performance quarterly, which requires continuous attention to short-term indicators, potentially at the expense of a longer-term focus. When this happens, it is clearly an obstacle to promoting sustainable, long-term investments. ‘At the same time, investors’ demand for information is legitimate to oversee and steer the allocation of scarce resources.’

The interim report has been welcomed by the International Integrated Reporting Council (IIRC), which says it demonstrates that financial and sustainability information must converge.

Richard Howitt, CEO, IIRC said, ‘The findings are an important recognition of the role integrated Reporting can play to help reform the capital markets system in the EU towards sustainable growth. ‘The concept of integrated reporting is built on the premise that financial stability and sustainable development go hand-in-hand, and the EU high level group has signaled a decisive step towards this for the EU itself.’

The IIRC pointed out that the expert group concluded that the ‘ultimate ambition has to be the convergence of financial and sustainability information’,  continuing, ‘integrated reporting supports this convergence qualitatively through reporting that links sustainability factors with firms’ strategy.’

The expert group is expected to publish its final recommendations at the end of 2017.

EU high level expert group on sustainable finance interim report Financing a sustainable European economy is here.

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