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EU High-Level Expert Group on Sustainable Finance delivers early recommendations

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14 Jul 2017

The High-Level Expert Group (HLEG) on Sustainable Finance, established by the European Commission, has published its first report setting out concrete steps to create a financial system that supports sustainable investments. Special significance is placed on the integration of information for investors and integrated reporting is cited as key to the ultimate ambition of convergence to low-carbon growth.

The report argues that sustainability needs to be put at the heart of the financial system and that to deliver systemic change, ESG factors and long-term sustainability risks and opportunities will be needed in corporate governance, core indices, accounting standards and credit ratings.

The authors note that the time horizon in finance is typically much shorter than the time horizon needed to address society’s pressing challenges; and the conception of risk in finance is typically much narrower than one that effectively captures economic, social and environmental sustainability. The resulting mismatch of time horizons would make certain social and environmental issues (such as resource depletion, which are likely to materialise only in the long term) become ‘externalities’ that are deemed ‘not material’ for financial markets and are thus not sufficiently accounted for by asset owners and managers.

However, the report states, social and environmental issues do have financial consequences in the real economy and for end-beneficiaries and should be accounted for. On accounting frameworks, the authors note:

While there are numerous initiatives on sustainability reporting, the ultimate ambition has to be the convergence of financial and sustainability information, supported by a more comprehensive set of accounting standards. Integrated reporting supports this convergence qualitatively through reporting that links sustainability factors with firms’ strategy. Accounting standards can help advance the quantitative element.

The report is aimed at readers in Europe and beyond, who are concerned about issues of sustainability, financial markets and the wider challenges for society. It is intended to provide the basis for fruitful and constructive consultations as the HLEG engages in the next phase of its work. The HLEG welcomes comments, questions and discussions during the process of preparing its final report for publication in December 2017.

Please click to access the full report on the European Commission website.

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