It has become clear in recent years that public policies need to be adapted to take on the new reality of climate change, resource depletion, environmental degradation, and social pressures. The financial challenge posed by these issues goes beyond the capabilities of the public sector. It will continue to grow if we do not act now. Given the size of investments needed to move to a greener and cleaner economy, private finance has a crucial role to play by reorienting capital towards sustainable investments. This requires a comprehensive shift in how the financial system works. Elia Trippel and Antoine Begasse, policy experts at the European Commission, explain the main issues and how the EU is dealing with them.

What has the European Commission done on sustainable finance so far?

At the end of 2016, the Commission appointed a high-level expert group to set out strategic recommendations for how to develop an EU sustainable finance policy. On 31 January 2018, the group published its final report arguing that sustainable finance is imperative both to fund society's long-term needs, and to safeguard the stability of the financial system. Based on the report's recommendations, the Commission adopted on 8 March 2018 an action plan on 'Financing Sustainable Growth' to set out an EU strategy for sustainable finance.

What is the main challenge that the quest for sustainability poses to the financial sector?

Finance can be a powerful force by redirecting capital towards financing sustainability challenges, for example into renewable energy and energy efficiency, clean transport and the circular economy. But this requires a change in behavior and mind-set to ensure sustainability becomes enshrined in all investment decisions. This change should be supported by policy interventions. To make an impact, sustainable finance must be integrated into financial decision-making at every level of the investment chain based on a clear definition of what is sustainable or not.  

In turn, the financial industry itself will benefit from this more sustainable, long-term perspective. Climate change can potentially result in financial losses, for example due to the increasing number of natural disasters. These will harm financial assets. On the other hand, the financial sector will benefit from opportunities for new investments in the low-carbon and more resource-efficient economy. Investors, including individuals, increasingly want to invest in line with their values. To navigate this landscape, the financial industry needs less focus on short-term profit, and more awareness and transparency about sustainability risks.

What first steps is the Commission setting out in its action plan?

The policy agenda laid out in the action plan combines legislative and non-legislative measures.

The first step is to define what is sustainable and establish an EU classification system, a taxonomy, for sustainability activities. This taxonomy will make sure there is market consistency and clarity. The Commission plans to table a legislative proposal in May that will put in place a system to develop an EU taxonomy.

Also in May, the Commission will put forward a proposal to make sure asset managers, pension funds and insurance companies take into consideration environmental, social and governance factors and risks in their investment decisions. The proposal will also aim to ensure they are more transparent towards end-clients.

Of course this will not be possible without the right transparency by issuers. This is why the Commission is going to evaluate the current reporting requirements for issuers to make sure they provide the right information to market participants. We launched a public consultation on this last week to collect views on this subject.

The Commission will also propose EU labels for green financial products, such as green bonds or green investment funds. The success of organic labels for food or eco-labels for clothing and household products has shown that labels can help consumers identify sustainable options.  

What is the broader political message of the Commission's initiative?

To achieve the EU's 2030 targets agreed under the Paris Climate Agreement, including a 40% cut in greenhouse gas emissions, around €180 billion of additional investments a year are needed. The action plan will play an important role in helping to deliver on the Paris agreement, as well as the UN's Sustainable Development Goals.

The action plan also fits into the EU's capital markets union project. Capital markets will play a key role in helping to reorient capital flows towards investments in sectors and activities that can contribute to the sustainability of the economy.

Overall, the Commission's initiative should contribute to making Europe a desirable destination for sustainable investments and a global leader in sustainable finance.

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