• Legislation on fiduciary duties should reflect breadth and variety of industry
• Risk calibration may not be most effective route to sustainability
• Taxonomy needs to be clear, flexible and based on existing standards

Private equity is well-placed to support the European Commission’s sustainable finance plan announced today, but any further measures need to take into account the diversity of the industry, says Invest Europe.

Today, the European Commission announced its Sustainable Finance plan, following January’s report from the High-Level Expert Group. Among other recommendations, the plan outlines that institutional investors and asset managers must explicitly integrate material environmental, social and governance (ESG) factors and long-term sustainability into their fiduciary duties.

“The EU’s goal of transitioning to a sustainable economy is important and private equity is well-positioned to support it,” says Michael Collins, CEO of Invest Europe, the association representing European private equity. “In order to create a truly sustainable finance landscape, the Commission’s plan needs to reflect the industry’s diversity and take a pragmatic approach.”

The plan’s following points are particularly important for private equity, according to Invest Europe:

Clarification of institutional investors’ and asset managers’ duties
“The target audience for the Commission’s new proposal is, rightly, broad but private equity investors and fund managers vary in size and have different investment models. For this reason, any legislation needs to leave sufficient flexibility on how to implement sustainable finance procedures in practice,” said Collins.

The asset class’s active stewardship and long-term investment horizons means many fund managers are already focused on ESG matters, both in their due diligence before choosing to invest and in their day-to-day management of the companies they back.

Invest Europe’s industry professional standards and reporting guidelines support the Commission’s aims. Outlining how investors and fund managers can consider sustainability as part of the investment-decision making process, the professional standards integrate ESG considerations throughout and encourage transparency on how this is done.

Potential revision of the prudential requirements for banks and insurance companies
Incorporating sustainability into banks and insurers’ prudential requirements is laudable, but could be difficult to achieve in practice.

“While it is important to consider ESG issues in all investment decisions, it remains unclear whether the risk calibration methodology in Solvency II or CRD is a suitable route to encourage this,” said Collins.

Taxonomy
The search for criteria against which to judge ESG factors could be a challenging exercise. Asset owner support will also be essential as they are the ultimate source of capital.

“Any taxonomy for sustainable assets needs to be based on existing widely accepted standards and definitions. It must be unambiguous, practical and adaptable as understanding of sustainability issues develops,” said Collins.

According to a recent survey commissioned by Invest Europe, 74% of global investors rate Europe as the world’s strongest region for commitment to sustainability and the environment. The same percentage said that sustainability is an important issue in their investment decision-making. Climate change is an area of focus this year for Invest Europe’s Responsible Investment Roundtable.