New European sustainable finance strategy - A welcomed steps forward opening new territories

On Tuesday, the European Commission released its Renewed Sustainable Finance Strategy (RSFS). Building on the Action Plan for Sustainable Finance published in 2018, it represents another key step in the right direction to green the financial sector and put our economy on a pathway aligned with the Paris agreement.

The first Action Plan - with the development of the taxonomy, the overhaul of non-financial reporting (CSRD, SFDR) or the development of standards (EU Paris-aligned Benchmarks, European Green Bond standards) - enabled the development of a first pillar in sustainable finance: increasing transparency (less greenwashing), developing common definitions for sustainable activities and accelerating data collection.

The renewed sustainable finance strategy comes at a time of unprecedented decisions: the Shell case, the Climate law ruling in Germany, the recent decisions taken by the FED, the NGFS launching a new study group on biodiversity risks, the ECB reviewing its strategy to integrate climate change...Those decisions are shaping a new dynamic, opening new frontiers in the area of sustainable finance. The strategy echoes this dynamic and opens the door to the development of a second pillar, which will directly touch the heart of financial market regulation.

Let’s take for example the integration of climate risk in prudential rules. Developing stress tests on banks' exposure to climate risk and how they integrate it will put climate issues at the heart of the reactor. The objective is clear: we will move from "you must collect data" on environmental, social and governance issues to "you must integrate them into your risk management system". Several approaches are possible and can be combined. One can lower the capital charges or the level of risk associated with labelled sustainable investments. Fossil assets can also be considered inherently riskier as they are more likely to become stranded assets. Today, investing in an oil or wind farm is considered to have the same level of risk. However this is not the case if we take the expected evolution of public policies. Technological change will accelerate. Past or future investments in highly carbon-intensive industries now carry an additional risk of becoming unprofitable in the medium term. This needs to be translated into rules.

Another example? Look at the accounting standards: until now, it was almost taboo to even raise the question of integrating the issue of sustainability linked to climate risks. Today, the European Commission is clearly putting the issue on the table, a world first. In an economy with a clear trajectory towards climate neutrality, it is essential for investors, lenders, managers to get access to data integrating such information to help them make appropriate assessment of the value of company. This is why, the Commission’s decision to work on how to reflect sustainability risks in financial reporting standards and accounting is much welcomed. We need to make sure the Accounting Rules are still fit for climate neutrality.

A last example? The decision from the Commission to assess the potential risk associated to biodiversity loss. Indeed, while we are advancing rapidly on rules / frameworks for climate issues, one has to recognize that the biodiversity agenda is not as mature as the climate one yet. However, there is a growing consensus that speeding up the work on this issue is essential. The decision from the Commission to prepare a report by 2022 to assess potential systemic risks associated with biodiversity loss both at micro and macro levels is opening a new, much needed dynamic at European level. It complements the NGFS recent decision to launch a Study Group on ‘Biodiversity and Financial Stability’ in April to establish an evidence-based approach to how central banks and supervisory authorities could fulfil their mandates in the context of biodiversity loss, with a focus on land-use and deforestation

Those examples show that the strategy sets all the foundations to allow a change of scale in the field of green finance. A change of scale in terms of the volume of green investments, but also a change of scale in terms of the integration of climate and other environmental risks (including stranded assets) by the financial sector.

In terms of volume, to achieve our increased climate ambition in Europe in 2030, we need to bridge an annual climate friendly-investment gap of 350 billion euros according to the European Commission’s figures. This means that without a credible financing plan covering both public and private investment needs, our ambitions will remain only objectives. Given that around two-third of the gap must come from the private sector, I welcome the Commission’s decision to perform an EU-level climate change stress test across the financial sector to assess the resilience of the financial sector in line with the Fit-for-55 package and to assist Member States in assessing by 2023 the financial market’s contribution to the climate change goals - i.e the climate friendly investment gap - that will cover banks, asset managers, pension funds and insurances companies.

Many other proposals are included in the strategy, such as clarifying fiduciary duties for pension funds, ensuring ESG risks are captured by credit rating agencies, continuing work on retail, reviewing investor duties, investor engagement and stewardship or working in parallel at the global level with partners to ensure others countries or regions are following Europe’s lead.  

With the Renewed sustainable finance strategy, we are moving from a transparency, disclosure and data building phase to a new phase where risk management and assessment of company values will have to integrate climate change. Much remains to be done to build all this, but the lines are moving.