Public hearing on sustainable finance Closing remarks Corso Bavagnoli (Chef du service du financement de l économie, DG Trésor / France)

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1 Public hearing on sustainable finance Closing remarks Corso Bavagnoli (Chef du service du financement de l économie, DG Trésor / France) (1. The work of the High Level Expert Group on sustainable is extremely timely and of the utmost importance and let me start with a warm thank you to the HLEG for this interim report that sets solid foundations for further designing a policy agenda to foster the development of green and sustainable finance. (1.1. As the interim report makes it clear, so far, post crisis international work has mostly focused on the robustness and resilience of the financial sector. But while delivering financial stability is a precondition to fostering an efficient financial stability, reemphasizing the purpose of finance, the importance of a purposeful finance, is a very welcome contribution. (1.2. The ambition the Commission set to the HLEG to propose a policy agenda that implement this intuition into EU policy and regulation is a daunting one. It reminds me of the question raised by our minister, ahead of the COP21 when he asked us to translate into an actual policy agenda the conviction we had been articulating in the run up to Paris: the conviction that the climate discussion was meaningful for the whole financial sector (and that this finance discussion was meaningful for the whole climate negotiation). (1.3. This intuition had two distinct but related sides that I recognized in this interim report. First, we have to have a financial sector that support and serve our wider vision about the economy. We won t be delivering a more sustainable economy if our financial sector does not understand sustainability. Then, delivering a low carbon, climate resilient and more generally, more sustainable economy requires some specific investments that requires mobilizing capital. I hope that both dimensions will be addressed in the final report so that your recommendations will help us progressing toward a financial system and a capital allocation well aligned with sustainability and that sustainability enhancing investments find their appropriate funding models.

2 (1.4. While turning this conviction into action in France, I learnt three things that are worth sharing with you as they echo the findings of the HELG or cast some light on their preliminary conclusions. (2. [Having clear ideas is essential] The first thing I learnt is that you don t achieve anything without having first a clear understanding of what is at stake and a way of ordering relevant ideas. In that respect, the report does a very nice job. Let me highlight three key ideas in particular that we should bear in mind while developing this agenda.first, it is essential to distinguish the two faces of the sustainability agenda. A lot of initiatives relate to green and sustainable finance. In the end, they either contribute to better aligning the financial system with long term goals or seek to facilitate private capital mobilization toward investment that contribute to these goals. Both are important but they are distinct and will require different policies. The first face of sustainable finance deals with the financial sector as a whole and will call for system wide initiatives to ensure that thousands of billions are efficiently allocated. The second face relates to the financing of specific investment which may require hundreds of billions but will be calling for targeted financial innovations, improved blended finance, etc. more than a system wide agenda. While this second aspect of the agenda has received a lot of attention over the past few years and as it is the primary focus of practitioners, the report puts, rightly in my view, a strong emphasis on the first aspect which, indeed, is the most relevant for regulators. (2.2. Secondly, it is worth calling a spade a spade and futher clarifying the overall objective with respect to the first face of the agenda: this is about bringing sustainability in the mainstream (which does not mean either turning each financial institution into a SRI or philanthropic investor). (2.3. Finally, it is necessary to make it clear what can we expect and what should we not expect from this agenda. In that respect, I have the feeling that the report should clarify what it means when it is calling from widening the perspective of financial institutions and regulators on time (becoming more long term) and risks (encompassing ESG/sustainability risks). This may mean improving the financial analysis that is underpinning capital allocation or expecting that capital allocation decisions should rest on something else. While the former is something that you can count me as a forceful supporter of, I would be more reserved regarding the latter.

3 Indeed, I would argue that finance has a key role to play but a role that is only complementary to what is happening in the real economy and to the policies that support or incentivize these developments. In particular, while I think we can expect that a smarter financial system can enhance the efficiency of the right policies, I don t think we should expect financial institutions to overcome a policy failure to address externalities, environmental or otherwise. This has profound implications that I hope the HLEG will fully reflect in its forthcoming work. In particular, I think we should seek to avoid exacerbating trade-offs between a sound financial decisions from the perspective of financial institutions and/or the financial benefit of savers of future pensioners one wide side and the sustainability agenda on the other. Indeed, I firmly believe that mainstreaming the concern for sustainability is about integrating that concern into the financial framework and should be about reconciling it with a financial perspective. (3. [Regulation is only one tool among other] A second key take away from the French experience, is that regulation is a powerful tool but cannot achieve everything. There are three important aspects here. (3.1. First, we should not forget that our main issue relates to things we don t know rather than things we haven t regulated. For example, the lack of proper integration of climate related risks within risk management practices is not primarily due to an inadequate regulation but rather to a (perceived or real) lack of knowledge about how these risks matters. As we ve argued in our recent report on the assessment of climate related risks in the banking sector, there is nothing in the current regulatory framework of the banking sector that impairs the recognition of these risks. Indeed, some risks are already taken into account (but may not be understood as linked to climate change and the transition to a low carbon economy). But other are not because, at this stage, no one is really in a position to present a clear quantitative view of these risks. (3.2. Second, it is important to recognize and respect the objectives of various regulations. Some can be rather innovative. For example, the reporting by asset managers and institutional investors foreseen in the article 173 of the French Energy Transition Act of 2015 seeks to foster the appropriation by financial actors of ESG issues. In that case, we regulated to nudge. But other pieces of regulation have another focus that should be respected. For example, prudential regulation should be about preserving

4 financial stability. While a sustainability agenda would obviously have a financial stability part, prudential regulation should not be tweaked to pursue other goals. And actually, as I have already alluded to, the current shortcomings may have more to do with what we don t yet understand than with an inadequate framework. (3.3. Finally, it is important to find the right balance between regulation and market standards. I would argue that, when innovation and tatonnement are critical to make progress, as it is the case on the sustainability agenda, we should make sure that the push from regulations responds to a pull from a large enough number of champions and that this dynamics is while also fostering the development of best practices and market standards that will allow market and products to mature. The poster child in that respect is the green bond market. I think we must recognize the role that the current governance of the market effectively played in allowing for the emergence and gradual strengthening of a standard. There may be a point at which a public regulation would prove useful. However, we should also recognize that, by then, we will have lost some flexibility. As new products are still developing and while the current governance of the market steadily delivers a standard that, combined with existing regulations, provide a robust enough and steadily improving framework, we can rely on other ways than regulations to improve the standard. This is one of the key reasons France decided to issue a sovereign green bond: to contribute from the inside to the strengthening of this market. And when we ll come to regulation, we should consider the impact of a specific regulation on the overall green bond market. The green bond market that serves us best has to achieve both depth and width and a strong emphasis on integrity, transparency and evaluation. At the very minimum, we should make sure that we are not fragmenting practices within Europe. (3.4. A final note on regulation. It seems to me that, at a fundamental level, the report is calling for an improvement of the culture and pursued intent of financial institutions and practitioners. I think that this is effectively the greatest challenge we are facing. I can also increasingly recognize this focus in the FSB s work. I would find it useful that the HLEG further examine what we can and should expect from regulation in that respect, how regulation can foster a change in culture and practices. And also clarify what we cannot expect from regulation and will remain the responsibility of people and institutions and maybe address a clear message to people and institutions to remind them of their responsibilities.

5 (4. [Focusing on result rather than specific means] My final point will touch on a related point. The report makes a strong argument for strengthening what our common law colleagues call fiduciary duty. (4.1. The debate on fiduciary duty is somewhat uncomfortable for someone with a civil law background. As the report alludes to, fiduciary duty is a common law concept that can, as such, only be brought to bear through jurisprudence. It is important, here, to clearly distinguish between the result that we are seeking to achieve and the path that leads there. Indeed, I would strongly support regulation that can foster a strong emphasis on the interests of the clients and beneficiaries and an appropriate culture to handle potential conflicts of interest. But while focusing on the result we should recognize that the path may differ across legal systems and that, in the fiduciary duty debate, we must disentangle what related to the overarching objective from what is linked to the specifics of a legal tradition. (4.2. As such, developing a single set of rules on conduct may be a valuable initiative. This set of rules should be developed across the whole financial sector although some adaptation to the specifics of the various functions could be necessary. And, in designing these rules, one should still recognized that, as I already mentioned regulation may still not be enough to fully reorient the culture of the financial sector. Overall, let me be clear: the HLEG s work is very important and the horizon that the report is sketching out, that of a purposeful finance, is something we should all keep in mind. We, as regulators, when we regulates. Others, as practitioners, when they contribute to capital allocation. Because, if finance cannot achieve much on its own, it can certainly contribute a lot more to advancing our economies. Finance is certainly a bad master but should become a good servant.