Europe is making significant strides to lead on green finance, and align its financial system with its climate, sustainability and clean energy ambitions.
The seminal COP22 in 2015, the 2016 G20 GFSG, the OECD Investing in Climate Investing in Growth report and the 2017 G19 Hamburg Climate & Energy Action Plan have provided ongoing momentum for policy moves towards a green financial system.
Here’s our pick of recent European developments:
1. CMU mid-term review: Sustainability, an increasing priority
Improving Europe’s leadership on sustainable investment is one of the new priority initiatives of the Capital Markets Union (CMU) Mid-Term Review, released in early June.
The CMU was launched in September 2015 as the EU’s flagship policy to better utilise capital markets to boost growth and investment across the continent.
In plain English this means better connecting finance to real economy outcomes: jobs, sustainable development, infrastructure and prosperity.
The Commission proposes to start working on improved disclosure and integration of Environmental, Social and Governance (ESG) criteria in ratings methodologies and supervisory processes, as part of the investment mandates of institutional investors and asset managers.
Significantly, it will also develop an approach to include sustainability considerations in all upcoming reviews of financial regulation, to ensure climate and environmental risks are addressed throughout the financial system, contributing to its stability.
In the CMU context, green debt securities are instrumental tools to the freeing up of capacity on banks’ balance sheets and favouring capital flows towards sustainable investments.
2. Expert Group on Sustainable Finance: Interim Report
The EU’s High Level Expert Group (HLEG) on Sustainable Finance launched its Interim Report in mid-July, to great interest from the finance sector regulators, investors and representatives of civil society and NGOs.
Check out a short video (1.26secs) on the HLEG project!
Convened by the European Commission the Expert Group is tasked with developing a comprehensive strategy and a practical toolbox on sustainable finance to be fed into the CMU process.
Amongst the interim report’s most promising recommendations is one introducing an official European green bonds standard.
The final recommendations from the Expert Group are due later this year, and the European Commission has committed to announcing implementation decisions in Q1 2018.
3. Environmental performance disclosure proposals to boost green securitisation
The European Parliament’s proposal to disclose the environmental performance of securitised residential loans and car loans/leases has been accepted by the Commission and Council in an excellent boost for a green securitisation market in Europe.
As part of the measures for Simple, Transparent and Standardised Securitisation, the new feature will require issuers to disclose information, where available, on the environmental performance of underlying assets.
This could make it easier for issuers to identify eligible assets for green securitisation deals and boost the market in Europe.
Green securitisation doesn’t attract the high profile attention that other parts of the green finance landscape do, but it’s an important part of the suite of policy measures to unlock capital flows for smaller scale green assets that are crucial to the low-carbon transition such as energy-efficient buildings and electric vehicles.
The OECD estimates that EUR 77 billion (USD 84 billion) of green asset-backed securities could be issued annually, in the EU by 2035, just for renewable energy, energy efficiency and private electric vehicles alone.
So far, only Dutch lender Obvion has issued two climate-certified deals, spearheading the market.
Climate Bonds previously prepared a short policy brief on the potential of green securitisation. You can find it here.
4. Launch of European Green Securities Steering Committee
Representatives from European banks, investors and rating agencies will meet regularly to influence policy directions and implement action plans to help further the development of the green debt market across Europe.
The Committee’s priorities include:
- Identifying regulatory and supervisory hurdles for green covered bonds, asset-backed securities and senior unsecured bonds, on both the issuer and investor side
- Supporting common definitions for green at EU level
- Exploring the potential of favourable capital treatment for green securities, guarantee options and loan packaging for energy efficiency
Coordination on the green debate is essential to achieve the European energy and climate goals.
5. New guidance on non-financial reporting requirements
At the end of June the Commission released updated guidelines on the disclosure environmental and social information.
The guidelines reflect most recent developments such as the work of the Financial Stability Board (FSB) Taskforce on Climate-related Financial Disclosure (TCFD), which published its highly anticipated final report in June.
Disclosure and transparency are key elements of the green bond market, tying investors to projects on the ground, lowering risk factors.
Non-financial disclosure can help boost corporate transparency in a consistent and more comparable manner, educating and encouraging companies to embrace sustainability directions.
There’s more to come as asset owners and managers absorb the full importance of the TCFD recommendations on climate risk.
The Last Word
There is a tangible sense that a tipping point has been reached in the EU. That policymakers, business and civil society recognise that sustainable economic growth and market stability can only be achieved through a financial system that better integrates capital flows and investment with long term climate, energy and employment goals.
Such realisation is finding expression in this raft of European policy measures,and also asset owner expectations around higher ESG standards and the gradual rise of the Sustainable Development Goals (SDGs) many of which raise issues around sustainable capital allocation.
On top of these shifts, in July global leaders identified the need for green bond markets to scale up tenfold and reach USD 1 trillion by 2020 as part of six urgent milestones need to make a real impact on meeting carbon and climate goals.
This USD 1 trillion by 2020 figure will emerge as a defacto measure of the performance of global finance in meeting international climate and NDC investment objectives.
Taking in the above in perspective it’s certainly been a fast paced few months for green finance and green bond markets in Europe.
We look forward to the EU political institutions seeing these commitments through. In combination they take green finance policy in the direction each COP conference, the GFSG, OECD and countless other organisations and forums recommend.
‘Till next time,
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