On 24 May 2018, the European Commission put forward the first of the concrete proposals it announced in its action plan on sustainable finance in March. The overall aim of the proposed measures is to make possible a European financial system that puts environmental, social and governance (ESG) considerations at its heart. Doing so would help promote sustainable investment, because it would make it easier for investors to take into account factors such as gas emissions, resource depletion and working conditions.

This is the first of a number of articles focusing on some of the specific measures that make up last week's package of proposals.While each of the initiatives is self-standing and designed to tackle different problems, together they contribute towards meeting the wider objectives set out in the action plan.

Investors' duties and disclosures

Achieving EU sustainability goals requires major investments. In the climate and energy space alone, it is estimated that an additional annual investment of €180 billion is needed to meet climate and energy targets by 2030. A substantial part of this will have to come from the private sector. Closing this investment gap means significantly reorienting private capital flows towards more sustainable investments and requires a comprehensive rethinking of the way the European financial system works.

Current EU rules do not explicitly lay down how ESG factors should be integrated into investment decisions and the advice offered to clients by providers of financial services (for example asset managers, insurance companies, insurance distributors, occupational pension funds or financial advisors). Evidence suggests that providers of financial products (i.e. investment funds, insurance) tend to focus more on maximising short-term returns and frequently disregard or underestimate the long-term effects that ESG factors might have on the performance of their investment decisions or advice. Disclosures related to ESG factors differ across the various different financial services sectors and fail to ensure comparability. As a result, investors can find it difficult to compare information and frequently do not get the full information they need to inform their investment decisions.

Concrete benefits

The Commission's package of measures includes a proposal to make sure asset managers, pension funds and insurance companies take into consideration ESG factors and risks in their investment decisions. Furthermore, asset managers and institutional investors who claim to pursue sustainable goals will have to show how they are complying with these duties and aligning their investments with these objectives. Information on ESG risk integration is directed to all investors and beneficiaries, irrespective of their ESG preferences. The new disclosure rules will provide investors with information that will help them understand the true ESG impact of the product they are investing in (potential impact of non-financial risks on returns of their investments). It will do this before the investment decision is made as well as afterwards, so investors can check if what was promised to them has been achieved.

The overall benefits of sustainable finance are far-reaching. Encouraging the financial sector to follow the objectives of decarbonisation and help fight climate change is clearly important for the environment and the economy. But it is also important for financial stability: the economic losses from extreme weather disasters rose by 86% between 2007 and 2016, and stood at €117 billion in 2016 alone.

The proposals form an integral part of the EU's efforts, under its capital markets union project, to connect finance with the needs of the economy and the EU's sustainable development agenda. It is increasingly clear that the role of finance as a catalyst for progress towards a greener economy is being underexploited. As former New York Mayor Michael Bloomberg said when he spoke at the Commission's sustainable finance conference in Brussels on 22 March: ''Capital markets are one of the most powerful tools we have in the fight against climate change – and one of the most overlooked''.

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