EU must require investors to prevent negative impacts of their investments on people and the planet

Wednesday, November 14, 2018 - 14:01

Today, the European Parliament's Committee on Economic and Monetary Affairs was given the mandate to start negotiations with the Council and the European Commission on a legislative proposal which could require European financial market participants to put in place policies to adequately identify and manage the environmental, social and governance risks of the investments they offer.

The proposal is part of the EU’s Action Plan on Financing Sustainable Growth, which aims at reforming the European financial sector to make it more environmentally and socially sustainable. At a time where the international community has woken up to the need for urgent action on climate change and sustainable development, the EU may finally be taking steps to better regulate those with concentrated economic power and enormous impacts on the environment and human rights: the finance industry.

Parliament takes on ambitious approach

The legislative proposal in question – “Disclosures relating to Sustainable Investments and Sustainability Risks” - was initially proposed by the European Commission as a regulation requiring institutional investors (such as pension funds), asset managers and financial advisors to publish their policies on sustainability risks in the context of investments that are presented to their clients (end-investors) as being sustainable. However, last week the Parliament adopted its position on the proposal, where it took a stronger stance by calling for the requirements to apply to all financial products, in an ambitious move to direct all investments originating in the EU towards improved transparency and performance on sustainability issues, instead of keeping the regulation limited to a small, “green” niche of investments.

Another significant change introduced by the Parliament in its position is the addition of a requirement for investors to put in place so-called “due diligence” policies and procedures on sustainability issues – that is, systems to identify potential impacts of investments on people and the environment, to prevent or mitigate these impacts, as well as procedures to account for and report on such impacts when they happen.

What this could mean for people in developing countries

A requirement to conduct due diligence has the potential of leading to a profound shift in the way the EU financial sector thinks and makes decisions, as it would introduce a new approach to “risks” – looking beyond purely financial risks, to risks towards people. This could lead to positive change not only within Europe but also on communities in the Global South, as big players in the financial sector would be required to improve their risk management systems by putting in place procedures relating specifically to the identification and prevention of environmental and social risks.

We urgently need this. As you are reading this blog, the number of negative impacts of business activities on the environment and on people in developing countries is increasing, often using money invested by European pension funds and asset managers. These negative impacts can range from poor working conditions, land grabs, threats against women human rights defenders, to environmental degradation and climate change leading to widespread food insecurity for women and men living in poverty. Requiring European investors to better identify these risks and put in place processes to prevent negative impacts would lead not only to encouraging investments to ethical and responsible companies and projects, but also to improved performance by all investee companies on the ground – wherever they operate.

What happens now?

The ball is now in the court of European member states: they have to support the text as amended by the European Parliament in order for it to become a law. This is the moment where our national governments need to resist to possible pressure and lobby by the finance industry to water down its regulation. There is a historic opportunity here that can’t be missed if our governments are serious about stopping climate change, fighting inequalities and ensuring social justice.

And as for the European Parliament, this week, it is expected to publish its draft report on a related legislative proposal – also part of the EU Sustainable Finance Action Plan – which will establish a common EU framework (“taxonomy”) for which economic activities can be considered environmentally sustainable for investment purposes. Human rights due diligence requirements must be central to this framework too, in order to prevent that an activity is considered green whilst having adverse impacts on people – from workers, to indigenous peoples and women in marginalised communities.