Kate Levick and Tsvetelina Kuzmanova / Jul 2021
Mairead McGuinness, European Commissioner for financial services, financial stability and the Capital Markets Union. Photo: European Union 2021
The European Commission will shortly unveil a renewed Sustainable Finance Strategy. This has the potential to be a roadmap for mobilising investment for the European Green Deal vision of a modern, resource-efficient, and competitive economy with no place and no person left behind. The stakes could not be higher – will the challenge be met?
The new strategy should address the breadth and complexity of the EU sustainable finance agenda. Key priorities include: greening public finance in the context of green recovery; a strong social dimension which addresses inequalities and future resilience; an international dimension in which Europe drives and shapes multilateral reforms to the financial system.
Important debates and events during the nine-month delay to the publication of the strategy mean that a strategic refresh is now required.
What has happened in the past nine months? For a start, the new US administration is moving rapidly to implement sustainable finance reforms although it does not always share the EU’s vision. As a result, sustainable finance is on the agendas of the G7 and G20. Europe’s ambitions for financial system reform are becoming a reality, however Europe’s continued role as the international sustainable finance norm-setter is no longer assured unless it can find win-win solutions with key allies.
Meanwhile the European reform agenda at home, originally uncontroversial, became a political battleground in 2020. Industry incumbents and some Member States resisted the idea of Europe using its own sustainable finance tools to guide its green recovery spending. They also pushed to weaken the taxonomy, making natural gas, nuclear power and biofuels the flashpoints. Members of the independent body tasked with governing the taxonomy suspended their work pending reassurances about its technical integrity.
In recent months the European sustainable finance agenda has moved forwards, and some of E3G’s September recommendations are now a reality. The Corporate Sustainability Reporting Directive will set an expectation that firms disclose climate-related risks and plans for transition, although a linked Sustainable Corporate Governance proposal has been postponed. The European Central Bank has made rapid progress with an economy-wide climate stress test and will shortly publish its full results, and the European Supervisory Authorities have continued to make progress on climate risk supervision. The UK’s exit from the EU has led not to a deceleration of pace by the EU, but a ‘race to the top’ to create new green finance reforms.
What gaps remain, and what actions do we hope to see taken forward in this new Strategy? The social aspect of finance is a top priority. Efforts are underway to consider a social taxonomy, but otherwise the existing agenda has included few actions to address fairness, inclusion or even climate resilience. The pandemic has highlighted and exacerbated the economic inequalities between and within Member States, while extreme weather has become a more regular occurrence. A strategy for mobilising sustainable finance at scale must therefore include consideration of who benefits, and who pays.
International leadership on sustainable finance must be at the heart of the new Strategy. Europe has been successful at inspiring sustainable finance ambition. Countries around the world have been working on creating their own green taxonomies including Russia, UAE and soon India. To reform the global financial system, these efforts must become aligned and interoperable. The frontier of discussions is no longer in Brussels, Paris, and Frankfurt but in the G20, the Financial Stability Board, and the IMF/World Bank meetings. Europe must play a strong role in these forums, following the example of the US which has been deploying political energy and senior officials to make financial system reform as a diplomatic priority.
Environmental integrity will also be a key priority. Bitter debates over the taxonomy’s finalisation, and its use in the public sphere, have threatened to weaken the EU’s ambition and reputation. Future reforms will need to address the stakeholder concerns which were raised, and demonstrably support the financing of transition activities. However, these transition activities should be defined in the context of the decarbonisation trajectory needed to achieve climate neutrality and Paris Agreement goals. The alternative is to risk supporting investment in future stranded assets and damaging the EU’s international reputation as a climate leader.
E3G expects to see continued strong action to green the financial system, building on existing progress and tasking the European prudential regulators to collaborate. The EU should maintain coordination and an open dialogue with other jurisdictions, especially the US and UK, so that international alignment can ultimately be secured.
The new Sustainable Finance Strategy will sit alongside the Fit for 55 package as an expression of what Europe stands for, and what future it wants to secure. The stakes are high – will the Strategy’s ambition level step up to the challenge?