An EU sustainability taxonomy, a definition of priority investment areas, the clarification of investor duties and development of “official” European sustainability standards for green bonds are some of the recommendations experts made to the European Commission on Wednesday (31 January).
The EU High-Level Group on Sustainable Finance, whose report was published today, is to put “the EU economy on a more sustainable path”, a Commission official explained.
Against the backdrop of the US’s withdrawal from the Paris agreement, Europe has decided to take a step forward to guarantee that more resources are mobilised towards ‘green’ projects.
According to Standard & Poor’s rating agency, the green bond market is expected to increase more than 30% this year and reach $200 billion.
Last year, most of the green bond issuance (around $60 billion) came from Europe.
But this is still a drop in the ocean. The 20-member high-level group recommends that the financial sector in Europe integrate further the environmental costs and channel more funds to sustainable finance.
“Our economic model is not functioning as it should,” said Christian Thimann of AXA, who chairs the group.
“The financial sector has a key role to play,” he told reporters on the eve of the presentation of the report.
The Paris Agreement signed in December 2015 acknowledged for the first time the key role the financial sector should play in mitigating the adverse effects of climate change.
As the appetite for ‘green’ investment products in Europe is growing, the group recommended the Commission develop official European sustainability standards and labels, to ensure that the funds contribute to achieving environmental goals.
As a first step, the group proposes introducing an EU Green Bond Standard, which would be followed by an EU Green Bond label at a second stage.
In order to get this label, the funds should be “exclusively” used to finance or refinance green projects, in line with a new EU Sustainability Taxonomy. In addition, the ‘green’ bond should be aligned with the green bond standards. Finally, an “independent and accredited” external reviewer should confirm the green bond’s alignment with the standards.
Establishing the taxonomy is one of the first priorities to ensure “market consistency”, Thimann explained.
“If Europe is to mobilise capital at scale for sustainable development, it needs a technically robust classification system to establish market clarity on what is ‘green’ or ‘sustainable’. This would enhance market efficiency and would channel funds to sustainable projects, while avoiding ‘greenwashing’.”
Thimann explained that the group also recommends clarifying investors’ duties. “Their obligation is not only short-term benefits but also looking at the long-term challenges,” he said.
The tension between ‘short-termism’, which is part of the financial markets’ DNA, and ‘long-termism’ is one of the challenges that need to be addressed, he added.
In this regard, the report suggests looking at market benchmarks in bond and equity markets used to assess the performance of markets and portfolios. These indicators have an “indirect but important impact” on the capital flows, the report notes, but are “not necessarily aligned with sustainability objectives”.
The group recommends introducing greater transparency and a long-term perspective aligned with environmental goals to these benchmarks.
The Commission was satisfied with the outcome of the report. “It exceeds our expectations”, an official said.
The executive will publish during the first half of March an action plan in which it will integrate part of the proposals.
The Commission already proposed last September giving more powers to the three European Supervisory Authorities to steer private capital towards green investment.
One of the ideas is that the European Securities Markets Authority, the European Insurance and Occupational Pensions Authority and the European Banking Authority control how financial institutions “identify, report and address” these factors in order to strengthen “financial viability and stability”.
The proposal is currently being negotiated with the legislators. Officials pointed out that this recommendation would not require altering the mandate of the ESAs, who gave a “very positive feedback” to it.
The EU executive is also looking at the capital treatment given to green investment. The European Parliament proposed lowering the capital cushion requested for ‘green investment’.
The backers say that taking into account climate, environmental and other long-term factors “may have a very positive impact on your risk analysis”.
Commission vice-president Valdis Dombrovskis, in charge of financial services, said the Commission is “looking positively” at this idea. But the institution is assessing how to do it without endangering the financial stability and maintaining a harmonised approach at the EU level.