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European Commission report highlights importance of sustainability preferences and ethical values for the financial sector

Bank of England Governor Mark Carney’s ‘tragedy of the horizon’ speech is a frequent point of reference in the final report from the High-Level Expert Group on Sustainable Finance (HLEG), who were convened by the European Commission. It is fitting that that speech addressed insurer groups because insurers have perhaps the longest view in the financial sector, when they assess the risks, for example, of a 100-year event. Other parts of the financial sector work in shorter increments, but those in a stewardship role on behalf of others face some push and pull between long-term strategies and nearer-term career risks.

Across the financial sector, there is tension between the long-term and short-term, between goals and careers. Even uncertain future developments like the speed at which climate change effects materialize are somewhat predictable today but still difficult to inject into financial decision-making, pulled into the undertow of short-term performance evaluation. This inconsistency means actions needed to realize long-term changes go unmet because short-term pressures to ignore long-term challenges are incentivized by the financial system. In the words of Governor Carney, “once climate change becomes a defining issue for financial stability, it may already be too late [to make a change]”. The same sentiment is relevant to many environmental and social issues.

The report develops many specific recommendations with merit both in Europe and as a model for other countries. It notes a critical role for transparency and highlights “a thread that runs through this report is the need for financial institutions to ask clients and beneficiaries about their sustainability preferences and ethical values.”  The method recommended by the HLEG makes this process a part of financial institutions’ “Know Your Customer” (KYC) requirements.

Read the full article here. 

Read more about the European Commission’s Final report of the High-Level Expert Group on Sustainable Finance here.

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