EU initiative for sustainable investments

On 8 March 2018, on International Women's Day, the European Commission introduced an ambitious initiative: Financing Sustainable Growth. In short, it was the prelude to launching a comprehensive regulatory framework at EU level that, in line with Agenda 2030, will finance sustainable growth and sustainable investments.

The importance of having clarity about what constitutes a sustainable investment to promote such investments was already pointed out at the launch:

"Lack of clarity among investors regarding what constitutes a sustainable investment is a contributing factor behind this investment gap and also an obstacle to financing the social infrastructure that is needed to address inequality and inclusiveness issues."

However, given the complexity of the issues, it was suggested to use a "step-by-step approach, starting with a taxonomy on climate change mitigation and adaption activities and some environmental activities. As a second step, the taxonomy will cover remaining environmental and social activities, recognising that one aspect of sustainability must not be detrimental to other related risks or objectives."

Some years later, the so-called disclosure regulation which addresses e.g. financial market participants (for example, insurance and occupational pension companies that provide pension products) and what they have to deal with when it comes to statements that their products are sustainable in various respects. In Sweden only, the managed pension capital amounts to more than SEK 5 trillion, and in recent decades, sustainability has become increasingly important for all of us who have to choose in which products we want our pension capital to be invested. Therefore, the Disclosure Regulation is central - it states the extent to which financial market participants are allowed to describe their products as sustainable and the criteria that should form the basis for that assessment.

The Disclosure Regulation covers all three components of sustainability (Environment, Social, Governance, ESG), but there is a clear emphasis on environmental sustainability, in line with the Commission's initial step-by-step approach.

A year ago, the so-called Taxonomy Regulation, which sets out the objectives in relation to environmental sustainability, was finally adopted. The Taxonomy Regulation thus creates the clarity that the Commission pointed out in 2018 was necessary to promote investment in sustainability in relevant aspects.

However, the introduction to the taxonomy regulation also states the following:

"In its communication of 8 March 2018, the Commission published its action plan on financing sustainable growth, launching an ambitious and comprehensive strategy on sustainable finance. One of the objectives set out in that action plan is to reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth. The establishment of a unified classification system for sustainable activities is the most important and urgent action envisaged by the action plan. The action plan recognises that the shift of capital flows towards more sustainable activities has to be underpinned by a shared, holistic understanding of the environmental sustainability of activities and investments. As a first step, clear guidance on activities that qualify as contributing to environmental objectives would help inform investors about the investments that fund environmentally sustainable economic activities. Further guidance on activities that contribute to other sustainability objectives, including social objetives, might be developed at a later stage."

The step-by-step method that was advocated in 2018 had thus a few years later been replaced by "might" develop more guidance on socially sustainable investments, but without leaving any further indication of when or if it was going to happen.

EU regulations are often written at a very high level and are supplemented by so-called regulatory technical standards (RTS). According to the Disclosure Regulation, the European Commission would in a first step establish RTSs linked to the environment at the end of 2020 (it has since been postponed) and in a second step set out RTSs linked to social sustainability by the end of 2021. In the draft RTS which the European supervisory authorities developed earlier in 2021, however, both environmental and social sustainability had been included, which indicates that nothing further on social sustainability will come, but the issue has not been further elaborated on in the draft and has not led to any major discussion.

The RTS contain detailed provisions on e.g. which so-called principal adverse sustainability impacts that financial market participants must measure and report as part of qualifying their investments in relation to sustainability. The criteria are thus an indication of what will be considered relevant in terms of sustainability. In a regulatory environment, financial market participants will probably avoid calling other types of investments sustainable that do not fall within the scope of what is highlighted here in accordance with what the European Commission also pointed out in 2018.

What are the factors that stand out in the RTS when it comes to social sustainability but perhaps most importantly - which factors shine with their absence?

Everyone must report the proportion of investments where the portfolio companies have been involved in breaches of OECD guidelines or the UN Global Compact and the proportion of those who do not follow up on how these are adhered to. The unadjusted wage gap for men and women in the portfolio companies and the proportion of women/men on the portfolio companies' boards must also be reported. Finally, everyone should report on the extent to which the portfolio companies are involved in manufacturing or selling controversial weapons. In addition, there are a large number of optional indicators of which you must report at least one: portfolio companies without policies against workplace accidents, accident level, working days lost due to injuries, accidents, deaths etc, no supplier code of conduct, no whistleblower channel, insufficient protection for whistleblowers, number of reported incidents of discrimination, the relationship between the CEO's salary and the median salary, no human rights policy, no DD process to identify/prevent/address human rights violations, no process to prevent trafficking, risk of child labor, risk of forced labor, number of identified cases of serious human rights violations, no policies against corruption and bribery, insufficient action against corruption and bribery and number of convictions for bribery/corruption.

Given that the question concerns what is needed for assessing the extent to which financial market participants' investments are sustainable, it is striking that perhaps the most natural criterion is lacking in terms of social sustainability:

Women start companies to a lesser extent than men. When it comes to venture capital investments (which may to a large extent be covered by the Disclosure Regulation at least because pension capital is also invested in such funds) today only about 1 % of the capital in Sweden goes to companies that are wholly owned by women while about 90 times as much goes to companies owned only by men. But if a financial market participant chooses to invest in women's innovations and wants to call it a sustainable investment, other criteria than just contributing to increasing women's economic participation in society will probably need to be sought.

When it comes to ethnicity and nationality, that aspect of social sustainability also shines with its absence. It is striking that two of the few mandatory indicators refer to the wage gap between women and men as well as distribution of board seats between women and men. Corresponding indicators regarding people who are born abroad are missing, despite the fact that we also know that there are major shortcomings in our societies in these respects as well.

What is disappointing about the EU's initiative on sustainable financing is that there is no lack of knowledge about the problems that exist for women and foreign-borns.

In 2021, for example, an EU initiative was introduced to provide 50 female-founded tech companies with EUR 75,000 each, as well as coaching and mentorship for the founders in light of the fact that such a small proportion of venture capital goes to women's companies. This initiative can be seen as a way of trying to change the lack of social sustainability within the EU, but it is striking that the EU in its major initiative for sustainable investments intends to ensure that EUR 1.3 trillion goes to environmentally sustainable investments but that the level of ambition around social sustainability extends to barely a crumb of bread. And it also seems to be a perception in the initiative that women founders need coaching and mentorship instead of the EU considering how they can make an effort so that the investment gap and the purchasing gap facing female entrepreneurs is reduced.

As long as we ourselves think that this is an acceptable order, it will last. As long as we ourselves believe that women have equal opportunities but need more training and more self-confidence, the current order will remain. As long as we ourselves do not reflect more on what is said but perhaps above all not said, the current order will remain.

Our society is currently facing major climate challenges. The climate challenges come from how we have mismanaged resources and let ourselves be guided by short-term profit goals. Perhaps the most important action to deal with the climate crisis is to focus on social sustainability and enable more women and minority groups to run successful companies that solve the challenges of e.g. the climate. These people can see society from other perspectives that are otherwise missed. It is all of our own pension money that this is about and what society we want to live in when we ourselves grow older. We should expect more from those who decide on the regulations that will affect how our pension money is invested so that the money contributes to a sustainable future where people can live safely and on equal terms.