Sustainable Finance European Style

By Sunny Lewis

BRUSSELS, Belgium, January 31, 2018 (Maximpact.com  News) – An EU-wide label for green investment funds, a European standard for green bonds, and a classification system to provide market clarity on what is sustainable are recommended in the final report of the High-Level Expert Group on Sustainable Finance, published this week.

The European Commission said it welcomes the report, which sets out strategic recommendations for a financial system that supports sustainable investments.

In 2015, landmark international agreements were established with the adoption of the UN 2030 Agenda and Sustainable Development Goals and the Paris Climate Agreement. The report attempts to put the EU on the path to fulfilling its obligations under these agreements.

The Commission established the independent High-Level Expert Group (HLEG) in December 2016. It is made up of 20 senior experts from civil society, the finance sector, academia and observers from European and international institutions.

HLEG is chaired by Christian Thimann, a professor at the Paris School of Economics and head of strategy, sustainability and public affairs of the AXA Group, based in Paris. He is an external member of the Council of Economic Advisers to the French Prime Minister.

The report by the High-Level Expert Group maps the challenges and opportunities that the EU faces in developing a sustainable finance policy that supports the transition to a more resource-efficient and circular economy.

In its report HLEG advises that reorienting investment flows into long-term, sustainable projects will improve the stability of the financial system.

The HLEG final report proposes:

• a classification system to provide market clarity on what is sustainable
• an EU-wide label for green investment funds
• a European standard for green bonds
• clarifying the duties of investors in achieving a more sustainable financial system
• improving disclosure by financial institutions and companies on how sustainability is factored into their decision-making
• making sustainability part of the mandates of the European Supervisory Authorities

The European Commission says it will now move to finalize its strategy on sustainable finance on the basis of these recommendations.

Delivering an EU strategy on sustainable finance is a priority action of the Commission’s Capital Markets Union (CMU) Action Plan, as well as one of the key steps towards implementing the Paris Agreement on climate and the EU’s Agenda for sustainable development.

To achieve the EU’s 2030 targets agreed in Paris, including a 40 percent cut in greenhouse gas emissions, we need around €180 billion of additional investments a year, says the Commission.

The financial sector has a key role to play in reaching these goals, as large amounts of private capital could be mobilized towards such sustainable investments.

The Commission is determined to lead the global work in this area and help sustainability-conscious investors to choose suitable projects and companies.

Valdis Dombrovskis, EU vice-president responsible for financial stability, financial services and capital markets said, “The signature of the Paris agreement in 2015 marked a milestone for the world and for the global economy. We are now moving towards a low-carbon society, where renewable energy and smart technologies improve our quality of life, spurring job creation and growth, without damaging our planet.”

“Finance has a big role to play in funding a sustainable future,” declared Dombrovskis. “I welcome the outstanding work of the HLEG which is excellent input for our upcoming strategy.”

“I believe this report is a manifesto for far-reaching reform,” Dombrovskis told the European Financial Forum 2018 at Ireland’s Dublin Castle today.

He said the Commission will use the HLEG report to propose an EU strategy on sustainable finance in March, followed by several legislative proposals.

“The future of finance will not only be digital, it will also have to be green,” said Dombrovskis.

Commenting on the HLEG recommendations, he said, “First, we need a unified EU classification system or taxonomy for sustainable assets. We need to define what is green and what is not green. And we need to identify the areas where sustainable investment is most needed and can make the biggest impact. A unified EU classification is fundamental for the development of any green finance policy. We will follow up this recommendation with the first piece of legislation in spring.”

As recommended in the report, Dombrovskis said, “We will present a proposal on fiduciary duty. It will clarify the need to take sustainability into account when managing money for others. Clients have the right to know how sustainable their investments are.”

Third, he said, “We could boost green investments and loans by introducing a so-called green supporting factor. This could be done at first stage by lowering capital requirements for certain climate-friendly investments, such as energy-efficient mortgages or low-carbon cars.

However, said the vice-president, “This exercise would be delicate. Green does not mean risk-free. Any measures would have to be carefully calibrated, and based on a clear EU classification.”

Finally, said Dombrovskis, “Further development of the green bond market can drive the investment that we need. With a unified classification system for sustainable assets, we could establish criteria and labels for green bonds and investment funds. These labels would help investors to easily identify financial products that comply with green or low-carbon criteria. We could extend the existing European Eco-label to financial products.”

The EU has set itself ambitious climate, environmental and sustainability targets, through its 2030 Energy and Climate framework, the Energy Union and its Circular Economy Action Plan.

These commitments, and the growing awareness of the urgency to address environmental challenges and sustainability risks, call for an effective EU strategy on sustainable finance.

Jyrki Katainen, vice-president responsible for jobs, growth, investment and competitiveness, said, “The EU is already at the forefront of investing in resource efficiency and social infrastructure, not least through the European Fund for Strategic Investments and its reinforced focus on climate action.”

“At the same time,” said Katainen, “creating an enabling framework for private investors is crucial to achieving the transition to a cleaner, more resource-efficient, circular economy.”

“The High-Level Expert Group on Sustainable Finance’s final report provides us with a roadmap to do just that, and we welcome their invaluable contribution to this very important issue,” he said.

The group’s report will form the basis of the Commission’s comprehensive Action Plan on sustainable finance that it will put forward in the coming weeks. Both the findings of the report and the Commission’s Action Plan will be discussed at a high-level conference on March 22 in Brussels.

Similar ideas are taking hold at banks across the European Union.

Green Tagging is emerging as the new strategy for Europe’s banks to scale up financing of energy-efficient housing and real estate, finds a report released in Paris in December alongside the One Planet Summit hosted by France’s President Emmanuel Macron.

Green Tagging is a systematic process where banks identify the environmental attributes of their loans and underlying asset collateral as a tool for scaling up sustainable finance.

The report, from the consulting firm Climate Strategy & Partners  and the UN Environment Inquiry into the Design of a Sustainable Financial System, finds that green tagging around real estate and energy efficiency is growing at a critical time.

Nick Robins, co-author and co-director of the UN Environment Inquiry, said, “Green Tagging is in an early stage of development, but the pace of change is now striking. Key banks are now recognizing that they need to understand the environmental performance of their real estate lending book in order to better serve their clients and deliver their sustainability goals.”

This report describes how 10 European banks “are beginning to identify, analyze and promote green finance for housing and real estate through the direct attribution of environmental characteristics in their lending and debt capital markets operations,” said Peter Sweatman, co-author of the report and chief executive of Climate Strategy & Partners.

The 10 pioneer banks are: ABN AMRO Bank in the Netherlands; Banco Bilbao Vizcaya Argentaria in Spain; Berlin Hyp in Germany; HSBC a British multinational bank with roots in Hong Kong; ING Real Estate Finance, a global financial institution of Dutch origin; Lloyds Bank, a British retail and commercial bank; Skandinaviska Enskilda Banken AB, a Swedish financial group; Italian bankds Suedtiroler Volksbank and UniCredit; and Triodos Bank, a Netherlands-based commercial bank.

The Green Tagging of bank assets allows for easier access to green bond markets, better tracking of green loan performance and provides greater transparency of climate risks and portfolio resilience.

“Tagging our commercial real estate and mortgage loans to existing energy and environmental standards enabled our internal transparency and supported our issuance of the first green covered bond,” said Bodo Winkler from Berlin Hyp, currently the largest European commercial bank issuer of green bonds. “The green tagging data provided us valuable insights into the relative credit and economic performance for our loans to green buildings compared to standard ones.”

Joop Hessels from ABN AMRO said, “Identifying and tagging green buildings in the bank systems in a European context was essential for the world’s first green bond to define green real estate, issued by ABN AMRO, and in advising other new green real estate backed bond issuers.”

Featured image:  Euro banknotes and coins, February 19, 2016 (Photo by verkeorg) Creative Commons license via Flickr

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