Is green the new black? Making finance environmentally friendly
T hought money and greenhouse gases had little in common? Think again! The realm of sustainable finance establishes new links between delaying climate change and the financial world via a varied tool kit which includes carbon pricing, subsidies and green bonds. Once regarded as ‘exotic’, sustainable finance is now at the forefront of the EU’s financial policy agenda.
On a global level, the adoption of the Sustainable Development Goals (SDGs) and the signing of the Paris Agreement on Climate Change in 2015 represented large-scale turning points in these efforts. As the UK prepares to withdraw from the EU, the Bank of England is using regulation to nudge banks and investors to change their ways by framing the threat posed by climate change not as an ethical issue that would resonate mostly with eco-warriors, but rather as a tragedy on the horizon that could rock financial stability.
At a European level, the European Investment Bank (EIB) was a pioneer in its field when, 10 years ago, it issued so-called ‘Green Bonds’ on the financial markets, just to mention one of many initiatives. The trend continues. The EU, as an active global actor, is addressing the rise in global temperature in various ways, the most recent initiative coupling climate change with the completion of the Capital Markets Union, a Juncker Commission’s pet project.
The sustainable finance package unveiled by the European Commission in May 2018, is not the first, nor will it be the last initiative to battle climate change. The action plan sets out a package of initiatives, including creating EU labels for “green” financial products or strengthening the role of asset managers and institutional investors to take sustainability criteria into account, and also on corporate reporting.
This progression to sustainability in finance is becoming the norm in the European sphere. The questions which need to be asked are: ‘What is sustainability?’ and ‘Where do we draw the line?’ The Commission is proposing a classification system within which to classify the sorts of activities that qualify as sustainable investments and against which to benchmark existing standards. To this end, an EU-wide taxonomy system is being proposed to help investors define sustainability and identify areas where sustainable investment can create the biggest impact. Up until now, only the EIB uses indicators to assess how ‘green’ investment projects are. The Commission is proposing the extension of the use of ‘eco-labels’ to financial products once the EU taxonomy has been developed.
The second proposal tackles a considerable matter within the financial scene, known as ‘greenwashing’, a term coined in the 1980s to describe outrageous corporate environmental claims. Were this proposal to come into effect, a new category of criteria comprising low-carbon and positive carbon impact benchmarks would provide investors with better information on the carbon footprint of their investments.
Once in force, these initiatives will be instrumental to help deliver on the Paris Climate Agreement and the SDGs.
While this battery of legislation might sound like music to environmentally-conscious European citizens, one has to be careful not to fall for green tape.
The question that arises is ‘What can we all do today to make a better tomorrow?’ Incentivising green finance requires an ambitious mind-set change coupled with a steady political impetus to be effective. If we genuinely want to move to a low-carbon society, where renewable energy and smart technologies spur job creation, we have to put our money where our mouth is and walk the talk before it is too late.
MEUSAC and the Ministry for Finance recently organised a consultation session on the sustainable finance package. Various attendees from civil society and government expressed their views and gave feedback on what Malta’s position should be as negotiations proceed in full swing. If you have any comments or suggestions, you are kindly asked to contact MEUSAC on consult.meusac@gov.mt