2020 Sustainability Taxonomy to guide green investment decisions, an official EU Green Bond Label and Standard and a new Sustainable Infrastructure body amongst major recommendations
Impetus now for EU Action Plan to help driving economic directions and climate action via green finance and sustainable investment
What’s it all about?
The EU High-Level Expert Group on Sustainable Finance (HLEG) has just released their long awaited final report “Financing a Sustainable European Economy”.
After a year of work, an interim report released last July and extensive public consultation, the final recommendations from the Expert Group have been released; they will form the basis for the Commission’s upcoming Action Plan on Sustainable Finance, to be announced on March 22nd. CEO Sean Kidney is one of the members of the expert group.
The roadmap covers both how to move capital flows towards sustainable investments and how to address sustainability risks in the financial system. Building on progress in several sub-sets of sustainable finance this is the first time the issue has been investigated so comprehensively.
EU-wide actions on sustainable finance have global implications, and HLEG is setting a precedent for other countries to follow.
What does the report cover?
Recommendations are grouped into priority actions, cross-cutting actions and actions specific to financial institutions and other sectors of the financial system.
Priority actions for the Commission are to:
- Introduce a common sustainable finance taxonomy, starting with climate change
- Clarify investor duties to extend the time horizons of investment and bring greater focus on environmental, social and governance (ESG) factors
- Upgrade disclosure rules to make sustainability opportunities and risks fully transparent
- Empower and connect citizens with sustainable finance opportunities
- Develop official European sustainable finance standards, starting with green bonds
- Establish a ‘Sustainable Infrastructure Europe’ to expand the size and quality of the EU pipeline of sustainable assets
- Reform governance and leadership of companies to build sustainable finance competencies
- Enlarge the role and capabilities of the European Supervisory Authorities to promote sustainable finance as part of their mandates
Cross-cutting recommendations include:
- Establishing a EU observatory on sustainable finance to track progress on sustainable finance
- Investigating alternative accounting approaches to current practices for long-term investment portfolios
- Examining the impact of energy efficiency on underlying asset values and financial risk management
- Developing ‘Sustainable Finance Compacts’ with key countries to promote sustainable finance policy reform at the international level
The three recommendations most central to green bond market growth:
1. Sustainable Finance Taxonomy
The HLEG’s effort is the first attempt at the European level to provide a shared EU classification of sustainable activities that is applicable to all types of assets and capital allocation including project finance, bonds and equity.
The Taxonomy is set to include assets that address climate change, environmental and social sustainability. Already in this report some screening criteria for climate change assets are proposed, with a view to develop a full taxonomy by 2020 through the establishment of a dedicated Technical Working Committee with public and private representatives.
The link with SDGs
This Taxonomy is particularly relevant in a market where both social and Sustainable Development Goals (SDG)-bonds are on the rise, and will serve to guide both issuers and investors around green, social and sustainable investments.
We’ve noted the increasing links between green bonds and the SDG goals, particularly as a source of finance for a sub-set of the goals (6,7,9,11,13 and 15).
Stay tuned for more discussion on this topic at our annual conference in late March and in an upcoming blog post where we’ll dive into how green bond investments, wider climate issues and SDGs fit together.
2. EU sustainable finance standards, starting with green bonds
The HLEG recommends the Commission introduce an official EU Green Bond Standard, with mandatory requirements around disclosure on allocation of proceeds, reporting and external reviews. The eligibility of green projects would be determined by the criteria established in the Sustainable Finance Taxonomy.
The HLEG also recommends developing accreditation criteria for external review providers and considering an EU Green Bond label to confirm alignment with the Standard – this is essentially the model of the Climate Bonds Standard & Certification scheme.
3. Sustainable Infrastructure Europe
The development of a pipeline of investable assets that meet sustainability requirements remains a challenge. To overcome bottlenecks, particularly limited project development capacity in areas of sustainable investment such as renewable energy and low-carbon transport, the HLEG recommends the establishment of Sustainable Infrastructure Europe – an entity built on existing institutions and designed to accelerate the development of high-quality infrastructure projects.
Ensuring a pipeline of projects is the basis of any green bond market or green finance roadmap – it is essential to enable the financial system to reallocate capital flows to sustainable assets and mitigate sustainability risks to financial stability.
Amongst the cross-cutting themes we expect to see action in the short-term in particular on energy efficiency investments and international ‘Sustainable Finance Compacts’.
The Compacts are an opportunity for Europe to shape sustainable finance reforms globally and consolidate EU leadership on climate action and investment at the international level.
Sean Kidney Climate Bonds CEO & Expert Group Member:
“The HLEG initiative from the Commission has been an incredible success and has been much more broadly applauded and welcomed than anticipated. The range of recommendations and proposals can make a substantial difference in ensuring the financial system supports the achievement of sustainability goals and environmental action.”
“These recommendations provide new foundations for a sustainable economy and not just for Europe but also for the world.”
Now to the European Commission’s Action Plan
We are now looking to the release of the European Commission’s Action Plan on Sustainable Finance on the back of the HLEG’s recommendations, expected on March 22.
In a recent speech at President Macron's One Planet Summit*, Vice-President Dombrovskis has already welcomed some of the HLEG’s recommendations, particularly noting the importance of a common EU sustainable finance taxonomy and the need to integrate sustainability factors into investment mandates.
We expect these to be taken forward in 2018.
The Commissioner has also been vocal about amending capital charges for banks through a green supporting factor, but this is expected to take longer to be implemented: The HLEG highlights the need for further evidence of the lower risk profile of green investments; in particular, banks would need to upgrade their assessment methodologies of material financial and non-financial risks by using forward-looking analysis that include and adequately weigh ESG-related risks.
Look out for a dedicated European session on the second day of our Annual Conference, March 20. Register here – Early Bird discounts end today!
The Last Word
The HLEG has overcome some initial skepticism and generated a huge amount of interest. The basic components, broad based representation from finance and civil society (including our own CEO Sean Kidney) and a focused 12+ month time frame has kept onlookers engaged in the process.
There’s also been a wider effect. The UK Government announced a Green Finance Task Force in September 2017. Canadian expatriates initially took up issue in August and domestic financial institutions subsequently have clubbed together writing to the federal government seeking a local equivalent.
In time we can see other nations adopting similar processes.
The EU can now make a jump on regulatory frameworks for green and sustainable investment, further harness the investment capabilities of its mature financial system, the patient capital of pension funds and mainstream green finance.
In the growing global climate race, this HLEG report provides a handy springboard.
Like many others, we now await the Action Plan.
‘Till next time
*Note: In a previous version of this blog we included another event name, the corrected event is the One Planet Summit.
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