NFU Blog

Mismatch: EU’s Action Plan for Sustainable Growth

Tomorrow, Juncker will be addressing EU’s Action Plan for Sustainable Growth. It is a visionary financial agenda which will hand the global leadership of the green transition to Europe.The Plan however fails to act upon its intention of an ESG integrated approach, and fails to recognize the interdependence between green actions and social factors. A mismatch that jeopardizes the aim to re-orient capital flows towards sustainable investments; mainstream sustainability into risk management; and foster transparency and long-termism.

The mismatch

At first glance, the Commission ambitiously incorporates environmental and social considerations in each action, outlining an ESG integrated path towards a sustainable economy. At further inspection nonetheless, each action, divided into activities, manages to exclude social ones. Action one (1), a call to set up a new expert group on technical standards for taxonomy was launched the same day as the plan itself; fails to call on experts or expertise of the social factor. It appears that the way each action is operationalized completely contradicts the preceding problem definition, as well as, the recommendations from the High-level Expert Group. Whom proposed that each sustainable action should be both environmental and social in aim and scope. The Commission adequately describes the social challenges of today’s Europe in numerous sections of the Action Plan (see article 1, 1.1, 4.2, 5, 6), for example:

“Social factors, such as poor working conditions and growing inequalities can have concrete consequences for financial institutions including legal risks […] Legal and reputational damage may well ultimately lead to financial losses. Similarly, growing income inequality can hamper long-term, stable growth […].”

The defined issues are however not matched with the same severe response as the environmental or climate challenges. The Action Plan illustrates the polarization between environmental and social issues and ultimately fails to bridge the gap and join them under the same flag for sustainable growth. But to do this is key – without the social elements of sustainable growth, there can be no green economy.

Social infrastructures

To re-orient capital flows to sustainable investments there must be infrastructures supporting it. Such infrastructures are by their nature social. Social because new regulation need to be disseminated through governance chains. Social due to the employees who implement and mainstream new directives. Social because of the suitability and preference of each customer. Social due to the individuals and communities that are impacted by each investment chain. With the social factor it is possible to build infrastructures that not only support, but also catalyze the green transition by means of competent and skilled employees and expanding new markets to meet social needs.

Social conditions

In addition to infrastructure, the mainstreaming of sustainability into risk management can be speeded up by enabling social conditions: time to give advice and listen to the ESG preferences of an investor; resources to find suitable products; and professional development to deliver on sustainability targets. The Commission is therefore correct in emphasizing the importance of regulated advice and fiduciary duty. NFU has consistently been advocating that the right to give good advice, and any improvements to, for example, MiFID II, can make the transition more efficient and effective.  In this manner already, existing frameworks can be widened and deepened to improve the algorithms and outcomes of green values. Their subsequent review should free up more time for each advisor-investor-meeting. Advisors have a right to give good advice and must be given time and resources to do so, before fulfilling arbitrary sales targets and undue short-term pressure that primarily cause harm to ESG objectives.

The ’no harm’-principle

Even though the Commission decided on green first, it is clear that the social factors are crucial elements for fulfilling the green objectives. Moreover, the Commissions explicitly pledges (article 2.1 p. 4) that no green taxonomy or factor shall be detrimental to the social objectives. For an appropriate application of the ‘no harm’ principle some minimum social standards are obligatory. Since without minimums there may be great difficulties in understanding what amounts to the level of detrimental. The outlining of the sustainable taxonomy must therefore include the consultation of experts and expertise from the social factor. Other procedural checks and balances include trade unions in stakeholder groups and employee representation in boards at all levels. They are key levers to mainstreaming any green ambitions, and to collect evidence on any harm to the sustainability objectives.

Disclosure & Accountability

In the case of apparent harm to any sustainability objective – that either green activities are causing harm to social objectives, or the prevalence of green washing – we first need reliable taxonomy and supervision tools, and secondly, protection for those who call out any such misconduct. Important steps have already been undertaken by industry to volunteer disclosure on both the environmental factor and the social factor. Before the ESG disclosure gets washed out, the Commission should take steps to map, standardize and call for regulated disclosure with a strict purpose to level the playfield for the investors who are willing to take initiative to the transition.

There are now a multitude of disclosure initiatives out there to take inspiration from, both globally, such as UNPRI and UNEP FI, and internal initiatives by individual firms. The ESAs are undergoing an impressive perennial review of their scope and mandate. The efficient use of resources would, however, be a simultaneous integration of ESG factors into their supervisory mandate following this revision instead of, as proposed by the Commission, to restart the same procedure yet again at a later time for the social factor alone. The Commission, even if ambitious, must take a more holistic approach to the planned activities, and it should use the existing momentum for sustainability to table truly integrated ESG initiatives.

The Social Objective

Finally, when it comes to the Commission’s promise to deliver also on the social aspect of sustainable growth it can only be said that the Action Plan, as written, does not include any planned initiatives contributing to the social factor over the next two years. A pledge to social objectives without activities and resources dedicated to them cannot be considered a win for inclusive growth. Instead the Commission fails to deliver solutions to its own acknowledged social challenges, it fails to give directive to fulfill Agenda 2030, and it risks the effective implementation of the Action Plan and the fulfillment of the Paris Agreement by extension. There can be no green success story without social factors that foster transparency and long-termism, and which works to strengthen social infrastructure, uplift social conditions, prevent detrimental effects on the social objectives, fosters ESG supervision and the possibility to hold investment chains accountable.

On Thursday, Junker will speak to the Union on the Action Plan for Sustainable Growth by which the global leadership for sustainability will be passed to Europe. However, as impressed as we are by the ambition of the proposed actions, we are worried by the mismatch between the suggested path forward and the recognized importance of the ESG integrated approach. The social factor cannot wait, nor should it wait, integrate it from the start.

 

Emelie Weski, Head of EU Affairs
@EmelieWeski

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