‘Think Sustainability First’ must be a principle that guides financial policymaking through this decade and the next if Europe is to have the means to match its global ambitions, writes Arlene McCarthy.
Arlene McCarthy is a member of the European Commission High-Level Expert Group on Sustainable Finance. She was vice-president of the European Parliament’s Committee on Economic and Monetary Affairs in 2009-2014.
In 2008, legislators focused their firepower on tackling the fall-out of the financial crisis and dealing with the excesses of a financial system which had become disconnected from the needs of the real economy. The priority was to strengthen the financial system against future potential systemic shocks and the result was MiFID II, a new European financial architecture putting stability, integrity and transparency at the heart of the financial system.
Fast forward a decade later as MiFID II comes into effect and there are new challenges and risks arising for the orderly functioning of financial markets. Climate-related risks highlighted in FSB chair Mark Carney’s ‘Tragedy of the Horizon’ speech underlined how short-term risk analysis may miss these long-term, non-linear and non-cyclical risks which if ignored could be systemic in their impact not only on financial institutions but on the wider economy and citizens.
It is clear that the culture and incentives in the financial system are currently misaligned favouring short-term financial results over long-term sustainable investment.
Financial stability continues to be the key driver for shaping Europe’s capital markets but what has changed is the nature of the risks that threaten financial stability. Climate risk, diminishing resources, energy shortages and the failure to deliver an equitable social economy could all deliver shocks to the financial system.
Governments are urgently seeking ways to foster sustainable economic growth and deliver on their commitments to the Paris climate agreement. The financial system and financial players have a key role to play in mobilising the capital to achieve these goals.
Circa €180 billion a year will be required for Europe to invest in renovating and building energy efficient buildings, for renewable energy to achieve a low-carbon economy. Mobilising private capital is the only way to rapidly scale up these investments and achieve the twin goals of sustainable growth while mitigating climate change.
The task given to the European Commission’s High-Level Expert Group on Sustainable Finance in January 2017 was to come up with recommendations to ensure finance and capital is put to work to enable a sustainable economic future.
One year on the group has delivered the final recommendations which not only capture the growing mood among financial policymakers for a new approach to capital markets but effectively establish the building blocks of a new European sustainable finance architecture critical to delivering on Europe’s 2030 sustainable development agenda, the Paris Climate Agreement and to creating the foundation for a more equitable social economy.
As a former legislator on European financial policy I know only too well the efforts required to achieve a consensus around common goals and recommendations and the difficulty in reconciling divergent and often opposing views.
What is remarkable is that such a diverse group of experts – banks, insurers, asset managers, stock exchanges, financial industry associations and civil society groups – frequently on opposite sides of the fence when influencing and shaping the post financial crisis reforms, came together as one and reached a strong consensus on these ground-breaking sustainable finance recommendations.
This in itself is a strong signal that the financial sector recognises the intrinsic value of moving capital towards sustainable investments.
What would be even more remarkable is if the wider financial community as a coalition of pro-sustainability financial actors embraced the recommendations, responded to the call to action from the HLEG group and follow-up with implementing actions.
There are some quick wins that the financial sector can get on-board with. Financial institutions can already actively seek their clients sustainability and ethical preferences for investing. At the ‘One Planet Summit’ a new momentum was generated on the FSB Task Force on Climate-related Financial Disclosures (TCFD) with now more than 230 companies with a market capitalisation of 5.1 trillion euros voluntarily adopting the TCFD recommendations.
Companies can support the reports recommendation for a TCFD business leadership and learning platform while the remaining 25 EU states and the European Commission can add their voice to France, Sweden and the UK who have publicly and formally endorsed the TCFD recommendations.
The European Commission’s Sustainable Finance Action Plan to be launched on 22 March will be the first bold step to give concrete effect in Europe to these recommendations. This will be the real game changer in accelerating the shift to a sustainable capital markets business model.
The Commission action plan should come forward with a policy mix for example setting standards for Green Bonds, improving legislation around the climate disclosure and reporting rules with the review of the NFRD directive to incorporate the best practice of both TCFD and France’s article 173 and hardwire the sustainability imperative into the future policymaking process by applying the ‘Think Sustainability First’ Principle.
Financial markets are global and with the US withdrawal from the Paris Accord it now falls to Europe to lead the international campaign on sustainable finance. Europe has a seat at the table at the G20, G7, the UN, the OECD, and IOSCO and should use its voice to speak up for and promote a global sustainable finance agenda.