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Sustainable Finance is a flagship initiative of the European Commission

Thursday, July 5, 2018

The financial sector can be supported to re-orient capital flows to contribute to sustainable development with a ‘’step-by-step’’ approach.

By Lorena Sorrentino, Senior Project Manager EU, CSR Europe

The European Commission (EC) estimated that an annual EUR 180 billion investment in resource-efficient energy and transport is needed to bring sustainability off the ground. The financial sector should actively take part in this effort, but needs a framework for concerted and mindful action of all the actors involved.

To facilitate this shift, the EC published  an Action Plan on Sustainable Finance in March.

WHAT IS IN IT FOR YOU?

To support members, CSR Europe’s latest EU Issue Insight 'Financing Sustainable Growth' highlights opportunities and hurdles of the EC’s Action Plan.

Effects will become tangible by the end of 2019 and the Action Plan solves 3 main challenges:

  1. Lack of information There is a lack of clarity among investors regarding what constitutes a sustainable investment increase the investment gap.
  2. Financial uncertainty – Credit rating agencies, institutional investors, banks and asset managers’ risk management usually lacks integration of ESG factors for investment decision-making.
  3. Short-termism and lack of transparency Since corporate reporting lacks transparency, it is difficult to assess the long-term value creation of companies and their management of sustainability risks.

MORE TRANSPARENCY

In May 2018, the European Commission put forward the first legislative proposals. "Mobilising private capital to fund sustainable investment is essential […] said Jyrki Katainen, Vice-President responsible for Jobs, Growth, Investment and Competitiveness in a statement. Today's proposals will increase transparency of sustainable finance and the investment opportunities it offers, so that investors have reliable information available to enable the transition to a low-carbon, resource-efficient and circular economy. "

KEY FEATURES OF THE MEASURES

  1. A unified EU classification system ('Taxonomy'): The proposal sets harmonised criteria for determining whether an economic activity is environmentally sustainable. By taking into account the advice of a technical expert group that was set up at the beginning of June 2018 (for the list of the Group’s members click here), the EC will identify activities that qualify as ‘sustainable'.
  2. Investors' duties and disclosures: The proposed Regulation will clarify how financial market participants should integrate environmental, social and governance (ESG) factors in their investment decision-making.
  3. Low-carbon benchmarks: This new market standard should reflect companies' carbon footprint and give investors greater information on an investment portfolio's carbon footprint. The proposed regulation also introduces the definition of the new categories of benchmarks: (I) Low-carbon benchmark and (II) Positive carbon impact (PCI) benchmark.

DEEP DIVE INTO TAXONOMY

The Taxonomy lays the foundation for all other measures on sustainable finance. It will take time and effort from a big coalition made of policymakers, experts and stakeholders to finalise the Taxonomy, and even more for it to produce impacts on the ground. However, the cornerstone is laid down.

Under the Commission's proposals, an economic activity would qualify as environmentally sustainable if it meets all of the following requirements:  

  • Contributing substantially to at least one of the six environmental objectives laid out in the proposal – namely climate change mitigation; climate change adaptation; sustainable use and protection of water and marine resources; transition to a circular economy, waste prevention and recycling; pollution prevention and control; and finally, protection of healthy ecosystems.
  • It should not significantly harm any of the other five environmental objectives.
  • It must be carried out in compliance with a number of minimum social and governance safeguards, for instance regarding labour rights.
  • It must comply with specific qualitative and quantitative technical screening criteria.

A taxonomy of the economic activities that are environmentally sustainable, and which investments (loans, stocks, bonds) can therefore also be considered sustainable, will facilitate market-participants to finance these activities and limit the risk of greenwashing. 

Mobilising an annual EUR 180 billion investment in sustainability by 2030 is therefore essential.

More articles by Lorena Sorrentino