EU unveils green finance strategy to mainstream sustainable investing

Hotly anticipated report from European Commission picks up many of the recommendations made by expert group earlier this year, including green finance taxonomy and more focus on green retail banking

The European Commission has unveiled a sweeping new strategy to boost the role of sustainable finance in driving emissions reductions throughout the trading bloc.

The long-awaited Action Plan on sustainable finance, released today, sets out a roadmap for helping the EU drive the €180bn of additional investment that is estimated to be needed every year to hit the EU’s target of cutting greenhouse gas emissions by 40 per cent by 2030.

It includes many of the suggestions made by the High Level Expert Group (HLEG) appointed by the Commission last year to help shape the EU strategy.

Notably, these include a common classification system for defining sustainable investment, one of the HLEG’s key recomendations. This taxonomy will also be used to develop an EU labelling system for sustainable finance products such as green bonds, to make it easier for investors to identify investments in line with green or low-carbon criteria.

The strategy will also seek to boost green finance’s presence in retail banking, and align the EU’s guidelines on non-financial reporting with the guidelines set out by the FSB’s Task Force on Climate-Related Financial Disclosures (TCFD).

Perhaps most controversially, the EU today signalled it could be willing to relax capital requirements for banks engaging in sustainable investments “when it is justified from a risk perspective” – a measure the HLEG stopped just short of unequivocally recommending.

“Moving to a greener and more sustainable economy is good for job creation, good for people, and good for the planet,” the Commission’s first vice president Frans Timmermans said in a statement. “Today we are making sure that the financial system works towards this goal. Our proposals will allow investors and individual citizens to make a positive choice so that their money is used more responsibly and supports sustainability.”

The action plan is seen as a crucial tool for shifting the EU economy onto a more sustainable footing.

Although green finance vehicles such as green bonds have been growing in recent years – in 2017 the green bonds market expanded 78 per cent – campaigners argue this is still not enough to drive the level of emission reductions needed under the Paris Agreement.

The contents of the draft strategy will be debated by the Commission at a high level conference later this month, but immediate reaction from campaigners was broadly positive.

Ingrid Holmes, director at non-profit E3G and a member of the HLEG, said the Commission had now “set the benchmark” for sustainable finance reforms around the world.

“This puts the EU on an accelerated path to deliver on the Paris Agreement on Climate Change and the UN Sustainable Development Goals,” she said. “The resolve and ambition of the Commission should be commended. This plan will help to reshape the financial system as a tool for good.”

However, some in the finance sector sounded a word of caution. Invest Europe, which represents private equity, venture capital, and infrastructure sectors and their investors, said any new requirements on investors and asset managers to integrate ESG and sustainability factors into their fiduciary duty must “reflect the industry’s diversity and take a pragmatic approach”.

Chief executive Michael Collins said this point is particularly important for private equity. “The target audience for the Commission’s new proposal is, rightly, broad but private equity investors and fund managers vary in size and have different investment models,” he warned. “For this reason, any legislation needs to leave sufficient flexibility on how to implement sustainable finance procedures in practice.”

Source: Business Green

Written by: Madeleine Cuff