On the European Commission’s High Level Expert Group on Sustainable Finance Report

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*This interview was conducted in 2018.*

Scott Douglas Jacobson: So in the past, you have been a member of the European Commission’s High Level Expert Group on Sustainable Finance, with the recent report published in February 2018. How did you come to earn that position?

What are the main propositions within the final report?

Professor Paul Fisher: So, there was a request for nominations at end 2016. I should note that serving on the committee was unpaid, so this is a volunteer committee. I was nominated by Cambridge University as a Senior Associate there.  With my background at the Bank of England and working on climate change there, that was probably the basis for it.

The recommendations are comprehensive. We’re expecting them to pretty much endorse everything, to set out their plan for what happens at least over the next year and a half before the next round of European elections.

They’ll be doing groundwork, to be taken forward to the next European Parliament. But we don’t know for sure what will be in the actual plan (editiorial note: subsequently published in March 2018). The recommendations are summarized under ten summary headings, although, there is probably about 100. It is quite difficult to be precise! Let’s say 100 recommendations.

Jacobsen: What are those areas?

Fisher: The first one is to introduce a common taxonomy. Because you cannot start to talk about classifying financial assets without precise definitions. So if you want to know what a green asset is, everyone has to agree on what the definition of green is.

It isn’t about rules at this point. This is about getting the dictionary correct. They’re already working on this, trying to specify this new taxonomy. And once you’ve done that, you can start making policy decisions based on the classifications.

The second area is around clarifying the duties of investors, to look at longer time horizons and bring greater focus on ESG factors  (that is environment, social, and governance). This is in particular for investors who invest on behalf of other people.

So in particular, if you have a pension fund, you are investing on behalf of the pensioners, you should have a really long-term focus, which should bring sustainable issues to the forefront. Now, the incentives for asset managers are often shorter term.  We’re looking at that.

Also, the duty of other investors managing their own money, companies at least, to think about those sort of issues. Because your duty to your company is not about short term profit making.

To make sure you include future shareholders as well as current shareholders, you need to  think about how sustainable profits are.

Third are disclosure rules. We had a report last year from the Task Force on Climate-Related Financial Disclosures. Basically, we want a framework that moves as close as we can get to the recommendations from that task force, and get it as close to mandatory as we can. There may not be any new legislation. It is meant to be voluntary rules, for disclosure on a ‘comply or explain’ basis. That disclosure is supposed to be around material exposures. It is proposed to cover things like governance, strategy, risk management and targets and metrics.

The fourth one is around empowering the citizens to connect with politicians. This includes things like improving information on sustainability performance, and financial literacy. It starts getting into having simple labels for retail funds, about sustainability.

Financial advisors should ask their client about their preferences. So, we can make sure that they are recommending what is suitable. That is supposed to happen under current laws. But they do not ask about sustainability.

Fifth is getting into sustainable finance standards, starting with green bonds. These are bonds, which are issued by borrowers with the proceeds promised to go to some specific green purpose. The market has been growing quite rapidly.  We have recommended a European green bond standard. So bonds, that meet that standard can have the label.

Sixth, to improve the supply of projects that need investment, we want to start something called Sustainable Infrastructure Europe.  Because a lot of the work we’ve been doing is looking at the supply of finance. But it is the demand for finance which is struggling to keep up.  There are not enough green projects to go around. We need technical assistance, especially for the public sector. That should help raise money for infrastructure.

Seventh, there is a general point about reforming governance and leadership of companies, sustainable finance competency, particularly within the financial system. The director’s duties and stewardship principles in that regard need to be clarified.   So, we think boards somehow should have some competency on these issues.  That they should consider things like carbon emissions and other factors. That blends closely with the investor duties, of course. But this recommendation applies to all companies.

Then finally, we want to enlarge the role of the European Supervisory Agencies. There are three of those, in particular, which are the Euopean Banking Association, the European Insurance and Occupational Pension Association and the European Securities and Markets Association. But what those three agencies do is coordinate with national regulators in their areas.

So, basically, first is prudential supervision of  banks; the second does insurers and the other one does market conduct and consumer protection. That recommendation has, to a certain extent, been implemented already. Because we already had the clarification last year. They should encompass sustainability, as a result of our recommendations.

So, those are the areas – eight in all, which are the summary of the recommendations. Then there are detailed sections within the Report, which cover all that.

Scott: You are also deeply involved with the Cambridge Institute for Sustainability Leadership and Climate Alliance Australia.  How do those particular organizations orient themselves in a similar direction, e.g. sustainability?

Paul: The CISL group, having been going about ten years. What they’re doing is work with companies, various work streams, mainly with the sustainable finance people, in banks, insurance, and asset managers. They look for common problems in the industry, to solve them.

They provide executive education for these companies:  bringing big companies up to speed with what the issues are and what they should be doing about it. Policy work, which is where I come in, it is to try and convince the policy setting agenda.

In Australia, its a much smaller group, but similarly, they work largely towards trying to get boards to take climate risks seriously. That has been going for a while in Australia. All of these groups work quite closely together.

They’re very similar outlooks. But in Australia, the problems are somewhat different, in that the politics is toxic because of the importance of the coal industry. There is a lot of superannuation funds who are big investors similar to life insurance companies. They’ve got funds at risk.

Scott: I want to ask about a personal approach question as well. Because you do have several years of experience in these areas. Where others do not have the ability to do it or the skill set built up to know what to do?

So when it comes to working with them, in a policy and sustainable economic framework, how do you go about working to influence decisions, either on your own where you are volunteering or contributing to a larger initiative to make that positive impact?

Also, how does that approach differ from some of the approaches that might be taken in different contexts that are not taking into account a longer-term sustainable perspective?

Paul: Most of the people have a lot more experience than me on the sustainability agenda. I’ve only been working on this for a few years. Some have 20 or 30 years’ experience. But most specialists in sustainability or they were from financial companies – specializing in particular aspects of finance.

My background: I was a macroeconomist and policymaker. I was the only one in the group who was a regulator and doing macro. So what do I bring to the party?  It is that experience of how to do policy, how to join things up as a macroeconomist, and what the regulatory issues can be in these scenarios. I am not a campaigner in the way, a lot of green campaigners are, or the sustainability people are.

I am interested in public policy, in good private policy for that matter. So, there is a sense of detachment which being an economist, a policy person, should bring you. I go out to talk to companies in the financial sector, I try to do that when I can.  I say: forget the politics and campaigning.  Even though this is a social, moral, ethical issue, you have to leave that aside and work with the mainstream business risk issue. If you do that, then you will start making the right decisions.

You will realize what the risks are, what the opportunities are, where the economy is going. Trying to bring that clear-headed view of what the issues are.  It is giving people permission to get on and do the right thing, forgetting about the politics – that isn’t important.

Most of the banks have these issues under their head of corporate social responsibility. So, it is seen as something needing doing, because the community wants it. But this should be under a business head, which is a CSR issue.

But you are not going to start transforming your business, taking opportunities and  avoiding risks, unless, your heads of business units are on side.  So get away from the many years of campaigning, get down to hard economics and the business environment and say, “This is the right thing to do if you want to make money.”

Scott: That is funny.

Paul: Invest in renewable energy if you want to make money!

Scott: That is very funny. I live in Canada. It is on a similar context. I could see an argument. In the short term, people are okay with tar sands, but in the long term may want to reconsider that as their main energy resource.

Paul: Tar sands are a stranded asset already. You should not be investing any more money in tar sands because it would get lost. It is a big black pit to pour money into. They should be investing in wind, solar, wave power, and hydroelectric. All sorts of things, but not fossil fuels.

The cost of renewable energy is now going through, falling below the costs of fossil fuel energy. The costs (of renewables) are still falling at 20 to 40 percent per year. So, this is a very rapid growth. UK energy production is at about 25 percent renewables. Germany over a third.

This is where the world is going. It is where the money is going to be made. Not in tar sands. Or other oil and gas. Gas may have a longer life than oil. But basically, the demand for it is going to see a very sharp drop.  For example, we’ll basically have electric vehicles powered by renewable energy, we won’t have petrol/diesel vehicles.

Scott: You do not have an obligation to make a statement here. What might this imply for either provinces or nations as a whole, pushing for things like pipelines in the immediate future?

Paul: They’re wasting their time and their money, basically. They need to be looking at renewable energy sources, not fossil fuels. Fossil fuels will be phased out, in a relatively short time period, I would say.

Renewable energy is getting so much cheaper, in many parts of the globe. It is cheaper to produce certain energy at home than the transmission cost across the grid. So however it is made – electricity – in the first place, there is a cost of transmitting it that is greater than it would cost to produce it at home.  That’s becoming increasingly true, everywhere could have solar energy. Other places will have wind energy, whatever the local conditions will supply.  We won’t need oil or other fossil fuels at all.

Scott: What was done before the geopolitical situation with countries heavily being exporters and heavily reliant internally?

Paul: Saudi Arabia is frantically trying to come up with a new economic policy. So, they can see the writing on the wall. Countries like India, China, need to jump through and go straight to clean energy. The problem is, they rely heavily on coal.

It is creating terrible pollution. So, they know they have to change, from the smoke and pollution. That was what drives those countries, what will drive all of this overall is the economics of it as well.  But the cost of the pollution effects will help drive it.

So, this isn’t any sort of cost, going green. This is a choice for cheap, renewable green energy. This is another example: Tesla are working on roof tiles which are solar panels. So, you replace your regular roof tiles with Tesla tiles.  You can have solar energy built into your house. Now, whether Tesla has succeeded making a business out of it, I do not know, but that is the way forward. Solar energy and wind energy, possibly, built into the buildings

We already see commercial buildings doing this, make them much more energy efficient. So, these changes are really happening. The difference will be when they go mainstream, as products.

Scott: What is the predicted time for them to become mainstream?

Paul: I think, usually happens, quickly. 2-5 years, we’ve already got the technology for driverless, electric cars. I’ve been in one. I sat in the middle of a three-lane highway without my hands on the wheel. Electric cars, they’re so quick!

Scott: I was in one in California. You do not hear much because they’re so well-built. At the same time, you feel as though you are going through, or at least I felt as though I was going through, the downswing of the roller coaster – by what I was seeing, rather than feeling.

Paul: It is not quite there yet, too expensive or too heavy. They are supposed to be bringing out the car this year, Tesla, which is half the price. Tesla isn’t a mainstream product yet. Somebody said that Toyota produces more cars in a day than Tesla has ever produced.

So, there is some way to go before it goes mainstream. But we are starting to see a big pickup in hybrid cars, which have some electric capacity. There will be no petrol, diesel cars allowed in cities, in 2030, 2040. People are starting to see the writing on the wall.

This is all going to happen. It’ll happen because of the economics. It’ll be cheaper to be driverless.

Scott: What do you consider the boldest proposal for the next 10 years in terms of renewable energy, sustainable energy?

Paul: I do not think it will take much more than common sense. People are supportive. What we’re going to see will be quite striking, it is not just about policy. The economy will change quite dramatically. It will change because of the economics. That will drive it.

That is going to be the boldest thing to happen. Petrol/diesel cars to electric cars don’t need a policy shift. It will be consumers that drive it.

And we’re now seeing, in the UK and Europe, the big push back against plastics. Or making sure that plastic is recyclable plastic at least. That happened, for me, in the past a month or two, after a television program. So when I think of the boldest thing, I think this is just going to happen by consumer action. It will happen because the economics will drive it.

We’re well on the way to see very big changes in the economy and the way in which people think about those issues. The policy is already mainstream. Since 2015, the Financial Stability Board has changed its policy agenda.  The setting up of a G20 Study Group for green finance, which in turn led to the EC Experts Group on Sustainable Finance. So, all these things have come since September 2015. Now, it is an unstoppable policy.

Trump may disrupt, nonetheless. But what you are seeing in the US is cities,  states, individual businesses, taking up the reins where the government has stepped back. So, I expect to see big changes. Some will be predictable, but some of them will be unpredictable.

We know big changes are going to happen. We do not know precisely what they’re going to look like. We’ve seen what will happen to the car industry, what will happen to the energy industry. There are many other industries out there.

Scott: Thank you for the opportunity of your time, Mr. Fisher.


Photo by Angela Compagnone on Unsplash

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