Financing a sustainable European economy

An extensive new strategy to green EU’s financial system is set to emerge later this year, further to an expert report published on 31 January.

Written by the 20-person High Level Expert Group on Sustainable Finance after exhaustive consultations with a broad range of sectors, the report Financing a sustainable European economy advocates sweeping changes to enable the EU to meet its commitments on climate change under the UN Paris Agreement, the UN’s 17 Sustainable Development Goals to 2030 and the related EU’s Agenda for Sustainable Development. Delivering an EU strategy on sustainable finance is also a priority action of the Commission's Capital Markets Union (CMU) Action Plan. The group's report will form the basis of the Commission's comprehensive Action Plan on Sustainable Finance to be issued shortly, with both documents to be discussed at a high-level conference on 22 March in Brussels.

Commenting on the report, Valdis Dombrovskis, vice-presi- dent responsible for Financial Stability, Financial Services and Capital Markets Union stated that "we are now moving towards a lowcarbon society, where renewable energy and smart technologies improve our quality of life, spurring job creation and growth, without damaging our planet. Finance has a big role to play in funding a sustainable future".

Jyrki Katainen, vice-president responsible for Jobs, Growth, Investment and Competitiveness added that "the EU is already at the forefront of investing in resource efficiency and social infrastructure, not least through the European Fund for Strategic Investments and its reinforced focus on climate action. At the same time, creating an enabling framework for private investors is crucial to achieve the transition to a cleaner, more resource-efficient, circular economy”.

In the report’s foreword, the Working Group chair, Christian Thimann, a senior executive at AXA, the global insurance company and former top adviser to the European Central Bank President Mario Draghi, emphasised that “sustainability means making eco- nomic prosperity long lasting, more socially inclusive and less dependent on exploitation of finite resources and the natural environment. This transition towards a more sustainable economic model requires large-scale investments to achieve the EU’s targets (to 2030) for energy and climate policy alone an additional annual investments of €170bn are required. The investments needed to meet the Sustainable Development Goals more broadly will be even higher. The current investment gap calls for rapid and substantial redeployment of capital”.

Headline recommendations are for an EU classification system, or “taxonomy” to provide market clarity on what is “sustainable”; clarifying investors’ duties in achieving a more sustainable financial system; a retail strategy on sustainable finance investment advice, ecolabel and SRI; minimum standards improving disclosure by financial institutions and companies on how sustainability is factored into their decisionmaking; an EU-wide label for green investment funds; making sustainability part of the mandates of the European Superviso- ry Authorities (ESAs); a European standard for green bonds; launching of Sustainable Infrastructure Europe; Governance and Leadership.

Cross-cutting recommendations address short-termism, sustainability and the “tragedy of the horizon”; citizens’ empowerment on sustainable finance issues; establishment of an EU sustainable finance observatory; benchmarks; accounting; accelerated energy efficiency investments; instilling the “think sustainability first” principle and leveraging EU action to enshrine sustainable finance at global level.

The latter would include wideranging support to ongoing UN activities as well as promoting a UN Framework Convention on Sustainable Finance (UNFCSF) to be established by 2019, as well as the development of national capital-raising plans within the “nationally determined contributions” (NDCs) to meet domestic climate mitigation and adaptation goals under the Paris Agreement. The EU should also press international standard-setting bodies to promote sustainable finance and call on the Organisation for Eco- nomic Cooperation and Development (OECD) to produce a convention on long-term sustainability risks clarifying that investors’ duties should incorporate sustainability issues. In addition, the EU should urge OECD to support and measure adult financial literacy on sustainable finance issues as part of the International Network on Financial Education reviews.

In a hard hitting final statement the report warns that “natural capital has typically not been included in the past in standard economic production functions, largely because it was widely thought that it could be taken for granted… it is essential to halt the destruction of natural capital and instead manage it within boundaries that maintain the resilience and stability of natural ecosystems and allow for resources to renew... the externalities generated by the misuse of natural capital are dangerously high.” The report can be downloaded from https://ec.europa.eu/info/sites/i nfo/files/180131-sustainablefinance-final-report_en.pdf