Financial institutions should be stress-tested for their exposure to “carbon-intensive assets”, according to a report from the Brussels-based think-tank Bruegel.
In a report based on the work of the EU’s expert group looking at sustainable finance, Bruegel has developed what it calls a set of guidelines for sustainable finance.
The report, Investing for the common good: a sustainable finance framework, said: “Financial institutions should be stress-tested to identify overexposure to and concentration in carbon-intensive assets. These carbon stress tests make use of various climate scenarios, including the adverse scenario of late adjustment resulting in a ‘hard landing’, and have a long horizon over which adverse events could occur.”
Last week the EU’s high-level group called for fiduciary duties across union member states to include a responsibility to manage long-term sustainability risks.
Filip Gregor, of the purpose-driven law firm Frank Bold, writes for Board Agenda: “Any solution to short-termism must, in addition to expanding and broadening an investor’s horizon, recognise that companies need to be protected from this pressure to maximise short-term shareholder value. Corporate governance policies must encourage companies to focus on sustainable long-term strategies directly, rather than bend to the will of investors.”
Bruegel also calls for supervisory “bias” to be shifted to “buy and hold” investments. The think-tank said: “An example is the introduction of sustainable retail investment funds, based on sustainability criteria (instead of transferability).”
Bruegel also calls on investors to band together to maximise their influence on companies over key issues, as well as moving to a “long-term performance horizon” for investments.
Executives should also change, said Bruegel, moving away from quarterly reporting and short-term pay structures.
Author Dirk Schoenmaker writes: “Why should finance contribute to sustainable development? The main task of the financial system is to allocate funding to its most productive use. Finance can play a role in allocating investment to sustainable companies and projects and thus accelerate the transition to a low-carbon, circular economy.
“Sustainable finance considers how finance (investing and lending) interacts with economic, social and environmental issues. In the allocation role, finance can assist in making strategic decisions on the trade-offs between sustainable goals.
“Moreover, investors can exert influence over the companies they invest in. Long-term investors can thus steer companies towards sustainable business practices.
“Finally, finance is good at pricing risk for valuation purposes and can thus help to deal with the inherent uncertainty about environmental issues, such as the impact of carbon emissions on climate change. Finance and sustainability both look to the future.”