Sara Dethier and Kate Levick / Sep 2020
Through the upcoming Renewed Sustainable Finance Strategy, the European Commission can set the bar high on sustainable finance reforms.
The path to Europe’s recovery from the economic impacts of COVID-19 will not be quick or easy.Europe’s GDP shrank by 25-30% during the most intense period of lockdown and is forecast to reduce by more than 8% in 2020 while unemployment is expected to increase to 9%. The shortfall in investment and social impacts induced by the crisis will differ substantially between Member States, and countries are expected to take differing approaches to the recovery.
Policy choices and plans made at the institutional level over the next 15 months will shape Europe’s future. These choices will have long-term structural impacts with the potential to influence a broad range of real economy and financial actors in the private and public domains.
The choices will need to balance short- and long-term needs to increase social cohesion, support biodiversity and climate action, and rebalance regional inequalities. The right choices will ensure Europe is building prosperity and resilience into its economies and societies.
In 2020, much of this long-term policy direction is being set through a slew of new financial frameworks including the European Green Deal Investment Plan, the Recovery Plan and the Renewed Sustainable Finance Strategy. There is also the European Investment Bank’s (EIB) Climate Bank Roadmap and the European Central Bank’s Monetary Policy Strategy Review.
Action is urgently needed now to make long-term investments that are compatible with a sustainable economy. European infrastructure investment has been in decline since the 2008-9 financial crisis.lags behind China, the US, Japan and South Korea in investing in innovation. Plus, Europe is facing an investment shortfall of close to €800 billion per year to meet its sustainability and digital ambitions.The pandemic will increase the existing investment gap and risks locking in a high emissions future which would cause significant transition challenges.
Huge financial relief and stimulus packages are in play, but short-term economic relief measures must not contribute to financing longer-term risk and inequality. Central and Eastern Europe face the risk of stranded assets, while Southern Europe is vulnerable to climate change impacts. European banks are already discriminating between borrowers based on their exposure to such risks. For ambitious financial reforms to be achievable and sustainable they must be fair and inclusive, addressing the climate challenge without leaving any region behind.
COVID-19 has exposed the need for increasing economic resilience and sustainability, but companies and governments continue to put significant amounts of money into unsustainable investments. Under the Recovery Package, the Commission now intends to apply sustainable finance tools designed for private sector regulation to European public funds. Ensuring investment flows sustainably to underserved sectors and regions will require existing institutions to act in new ways. Plus, a more diverse ecosystem of financial institutions must emerge.
The success of Europe’s financial reforms will depend upon its ability to set new norms for the global financial system. With Italy leading the G20 in 2020, the United Kingdom leading the G7, and both countries partnering to lead the COP26 UNFCCC climate talks, the European Union has the opportunity to work with allies to make finance a core pillar of international diplomacy.
Now is the time to think long-term, creating a new vision for financing Europe’s future. E3G’s recommendations for action are set out in a new report “A Vision for Sustainable Finance in Europe: Financing Europe’s Future Sustainability” published today.
Key recommendations include:
- Public Finance – sustainability-proofing the EU budget and funding mechanisms; applying appropriate conditionality to state aid and greening national budgets and fiscal policy; and adjusting the mandates and capitalisation of public banks to achieve sustainability goals.
- Private Finance – creating disclosure plans to transition to climate neutrality by 2050; ensuring the taxonomy remains science-based and apolitical; and integrating sustainability into long-term decision-making at financial firms.
- Fairness – supporting fair access to affordable capital across Europe by the Commission and European Investment Bank; creating a pipeline of bankable projects, and addressing just transition from a wide range of actors including Member States down.
- Inclusion – ensuring citizens can invest sustainably without fear of greenwash; ensuring public access to sustainability data that affects citizens’ lives and communities; and protecting citizens from financial exclusion linked to sustainability risks.
- Resilience –considering resilience in all public finance decisions, complementing the ‘Do No Harm’ oath; adopting national and regional plans for climate adaptation by all Member States; and developing a European public-private disaster risk finance pool.
- Systemic Risk – joining up the European Supervisory Agencies on climate risk; creating a taxonomy of unsustainable economic activities by the Commission; and greening European monetary policy via the European Central Bank
- Infrastructure – creating a European Panel on Climate Change supporting Member States to make sustainable infrastructure investments; improving infrastructure project development capacity at the regional and local level; and encouraging green infrastructure bonds.
- Innovation – creating a pan-European approach to research and innovation; supporting public finance institutions and national strategies in crowding in private patient capital; and prioritising sustainability.
- International Leadership – prioritising finance for international diplomacy in 2021; maximising the impact of the International Platform on Sustainable Finance; and concentrating on sustainable reforms to public banks and development finance institutions.