Sustainability and inclusivity have correctly been placed as guiding principles for Europe’s finance policy. The next few months – with decisions on the EIB and the start of a new European Commission – will be decisive in order to put those principles into action, write Tom Jess and Sandrine Dixon-Declève.
Tom Jess is policy advisor working on sustainable finance at E3G, a climate think-tank. Sandrine Dixon-Declève is Senior Associate at E3G and co-president of the Club of Rome. She is also a member of the European Commission’s Technical Expert Group on Sustainable Finance.
The future European Commission, headed up by Ursula von der Leyen, will put sustainability and inclusivity at the heart of the European financial policy. Over the last weeks, as the European Parliament elected Ms von der Leyen and approved most of her team, it was clear that advancing sustainable finance will be a key driver in their ambition for Europe to become the first climate-neutral continent.
Valdis Dombrovskis (ex-Prime Minister and Minister of Finance of the Republic of Latvia) will become Executive Vice-President of ‘An Economy that Works for People’ and Commissioner for financial services. He spearheaded sustainable finance in the EU under his role as Commissioner in the Juncker Commission and he’ll continue where he left off.
During his parliamentary hearing he continually highlighted the importance of his role to support green and digital transformations, while also ensuring social fairness. It is hoped that strong connections develop with Frans Timmermans responsible for a ‘European Green Deal’.
Dombrovskis will be responsible for developing a new green finance strategy and coordinating an investment plan worth €1 trillion of climate-related investment over the next decade (the Sustainable Europe Investment Plan). He confirmed that he will review the corporate disclosure rules (particularly the Non-Financial Reporting Directive) to integrate greater focus on sustainability. He will also oversee turning the EIB into a climate bank by making half of its total financing dedicated to climate investment by 2025, and he believes phasing out of fossil fuels from the EIB should be part of the strategy.
Yet, as the European Commission, with approval from the European Parliament and immense technical support from an expert group, drives forward to advance sustainable finance, the Member States are dithering.
Last month the Council agreed a common position on the regulation to create a new sustainable investment taxonomy – but only after months of negotiations over its governance and timeline, and a last-minute row over whether experts could be allowed to independently determine what economic activities can be considered ‘sustainable’ free from political influence. In the end the Member States agreed to seek to postpone the taxonomy’s entry into force to 2023, a delay of almost five years from the original Commission proposal.
Meanwhile, tensions are also evident at the European Investment Bank. The Bank – which the Commission wants to turn into a ‘climate bank’ – is seeking approval to end investments in fossil fuels by 2020 but its shareholders, the Member States, are so far not all in agreement on the proposal.
Despite divisions, Member States are showing leadership both individually and collectively on sustainable finance. In the Netherlands the government recently announced its National Climate Agreement, which includes a commitment by Dutch financial sector firms to measure, monitor, manage and reduce the environmental footprint of their balance sheets. France is considered to be a leader on sustainable finance for the adoption of Article 173 on investor climate reporting. Earlier this year Member States agreed to legislation to integrate the disclosure of sustainability risks within investor duties and on the creation of climate benchmarks.
Progress has been made across Europe, and individual leadership examples abound. Yet as was shown with Germany’s disappointing position on the taxonomy, more support is needed to truly advance sustainable finance at the pace and scale required to align with the Paris Agreement.
The vision of a sustainable and inclusive future for Europe from the Commissioners-designate, together with their commitment to put this into practice in the area of finance, is far more compelling than the uncertainty of some Member States. It is also the right, and only, direction to go if Europe is to address its current unprecedented challenges (which advancing sustainable and inclusive finance can help to address) while transitioning to a resilient, climate-neutral economy:
- Technological shifts are disrupting politics and the economy, yet digital technology, automation and Artificial Intelligence offer to accelerate the structural economic transformation required for decarbonisation and resilience;
- The financial outlook for the global economy is gloomy, yet investing in the future Europe European citizens want can strengthen the economy, provide economic stimulus under pressure, and rebuild trust in the financial system.
- Europe faces growing pressures on its internal cohesion and unity, yet rebalancing access to affordable capital across the EU to deliver socially sustainable investment can provide support to the European project and meet the needs of citizens.
- Geopolitical instability is rising, yet management of climate and other sustainability risks with investment in future needs can help to increase resilience and reduce financial volatility.
In the coming weeks and months ahead, Member States will make decisions to finalise both the taxonomy regulation and the EIB’s energy lending policy. The European Commission can support them in taking these decisions by taking further actions to support the transition to a climate-neutral economy while addressing Europe’s other challenges and opportunities. Four recommendations to do so include:
- Strengthening the governance structure on sustainable finance by taking forward the recommendation of the High-Level Group on Sustainable Finance for a European Observatory on Sustainable Finance. This would monitor progress on greening financial flows, acting as the core component of a continued sustainable finance reform agenda and European Green Deal.
- Directing investment towards a sustainable economy by applying strict climate proofing to the Sustainable Europe Investment Plan and the InvestEU Programme, while supporting the phase out of fossil energy lending from the EIB by 2020. In addition, stimulus measures should be prepared immediately which focus on strengthening the economy through its social and environmental priorities.
- Adopting measures which provide inclusive access to capital for all Europe, particularly ensuring that finance flows to the Eastern Europe in areas such as distributed clean energy, efficiency, smart system and resilience projects. This should be supported by aligning all structural reforms aimed at speeding up growth-enhancing investment with the transition to climate-neutrality.
- Prioritising increasing Europe’s resilience to climate change through financial reforms to protect Europe against systemic risks. The reform of the Non-Financial Reporting Directive is welcome yet more direct action is needed, such as ring-fencing support for regions of Europe that will be affected by the climate transition either through economic restructuring or increased climate impacts. This could build on the experience of the Platform for Coal Regions in Transition. Additionally, expanding the EU’s taxonomy to define “unsustainable” economic activities can ensure investments that are not physically resilient to climate change and natural disasters are avoided.
Sustainability and inclusivity have correctly been placed as guiding principles for Europe’s finance policy. The next few months – with the decision on EIB, the start of the new European Commission and finalisation of the taxonomy all imminent – are moments when these principles can be put into action at speed. This is a huge opportunity to create a prosperous, fair and sustainable Europe which should not be wasted.