09 Jul 2021 4 min read

Is it a Grand Slam for the EU’s new sustainable finance strategy?

By Alexander Burr

Whether Wembley or Wimbledon, Tuesday 6 July was a rather dramatic day for many of us. It was also a rather historic day for the sustainable finance community, as the European Commission finally released its ‘Renewed Sustainable Finance Strategy’.

 

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If a few of you are thinking, ‘wait, doesn’t the EU already have such a strategy?’, you’d be right. However, a lot has changed in the sustainable finance world since that was first published in 2018. If the EU wants to maintain its global leadership position, it needs to continue to push the policy boundaries. So, is the new strategy a ‘grand slam’ or has the Commission ‘missed the penalty’?

Well, let’s first look at what it covers and what might be missing. At a high level, the Commission is building on existing work rather than reinventing the wheel. It is meant to be a comprehensive package of measures (legislative and non-legislative) that will support the EU’s recovery from COVID-19, meet the targets of the Green Deal, and put the EU on a solid path to meet its net-zero 2050 commitments.

The strategy is broadly split into four pillars:

1. Financing the transition of the real economy toward sustainability – extending the Taxonomy to recognise transition activities, financing specific activities that help reduce greenhouse-gas emissions, and extending sustainable finance standards and labels that support the transition.

2. Moving towards a more inclusive sustainable finance framework – expanding retail investors’ and small and medium-sized enterprises’ access to sustainable finance opportunities, leveraging digital technologies, expanding insurance coverage for climate and environmental risk, green budgeting and risk-sharing mechanisms, and producing a Social Taxonomy.

3. Improving the financial sector’s resilience and contribution to sustainability (double materiality perspective) – financial reporting to include sustainability risks and encourage natural-capital accounting, ensuring ESG risks are captured by rating agencies, integrating sustainability-risk systems in banks and insurance firms, monitoring sustainability risks on long-term financial stability, reinforcing science-based targets and monitoring of the financial sector’s commitments, fiduciary duties and stewardship rules of investors, improving ESG ratings and research, assessing supervisory powers to address greenwashing, and improving cooperation between authorities.

4. Fostering global ambition – promoting cooperation and international sustainable finance initiatives and standards, proposing to extend the International Platform on Sustainable Finance to new topics, and supporting low- and middle-income countries.

The EU has also released the voluntary ‘European green bond standard’ (EUGBS) to encourage companies and public authorities to raise funds on the capital markets for green investments – see my colleague’s new post on green bonds for further information.

Immediate reaction

Well, this is starting to look like they’re on the road to a Grand Slam! Each pillar is itself quite impressive. We have commitments to tackle areas where we have been long advocated for action, such as greater ESG disclosure across the investment chain, how we categorise and finance transition activities, ESG reporting in a way that incorporates the double materiality concept (again something we’re strongly behindas are the G7), and recognition that ESG analysis covers more than just climate change through the development of a social taxonomy.

It’s equally pleasing to see the focus the EU has on the international aspects of this strategy, as another area we have had serious concerns on is the harmonisation or convergence of the plethora of sustainable finance (or green) policies and regulations. For example, we need the EU to align with internationally accepted sustainability standards for corporate disclosures (e.g. IFRS SSB workstream). It also works the other way: the EU Taxonomy is far from perfect (note just two of the five environmental categories are released so far), but creating a new set of criteria in each market is just going to add to the confusion for end investors and weaken the entire objective of the broader policy (which if you view as a package is encouraging capital into green and sustainable activities). We are cognisant of this potential issue and continue to engage policymakers on this matter.

Another welcome move is the Commission’s commitment to engage with European Supervisory Authorities to review the Regulatory Technical Standards of the Sustainable Finance Disclosure Regulation (SFDR), clarifying adverse indicators on climate, environment, human rights, anti-corruption, and anti-bribery.

There are nevertheless areas where I feel the EU may have ‘missed that penalty’. For example, is the EU actually intending to strengthen stewardship across the entire policy agenda, how will stewardship activities be measured and enforced, and is stewardship applied across the entire portfolio or just ‘sustainable’ funds? What about further detail on the proposal for developing a ‘sustainable corporate governance’ standard, or clarity on human-rights due diligence along the supply chain? Or even reflection on how the EU’s political process has weakened the independent scientific advice of the EU Taxonomy?

So, with my finest umpiring skills, I would suggest the EU is close to ‘game, set and match’ – but given a lot needs to be further clarified and brought together, it’s still in the hunt for that elusive sustainable finance Grand Slam!

Alexander Burr

Global ESG Public Policy Analyst

Alexander joined the team in September 2019 to focus on strengthening LGIM’s public policy engagements across jurisdictions. Prior to this, Alexander spent three years leading international government and institutional relations for a firm that uses alternative finance to invest in sustainable projects in emerging markets. Before that, he spent five years negotiating investments in emerging markets with the European Commission and international climate change funds at the European Bank for Reconstruction and Development (EBRD). He also spent time advising middle and low-income governments on alternative finance and jointly establishing a nuclear energy safeguards organisation. Alexander holds a BSc in Politics and International Relations from the University of Southampton.

Alexander Burr