Sustainable finance as a weapon against climate change

Sustainable finance as a weapon against climate change

July 27, 2018

Sustainable finance as a weapon against climate change

After the December 2015 Paris Agreement on climate change, the European Commission turned its attention to sustainable finance and recently produced a concrete proposal for legislation in this area.

24 May 2018 marks an important date for finance in Europe: the day on which, thanks to specific proposals, the European Commission adopted its first concrete actions in the move towards a greener, cleaner economy. The aim of the sustainable finance policy introduced by the new laws is to "allow the financial sector to throw its full weight behind the fight against climate change", as stated in the official press release issued by Brussels, which also underlines Europe's commitment "to be the global leader in fighting climate change and implement the Paris Agreement". 

A complex scenario

The Paris Agreement on climate change set the ambitious target of restricting the average rise in global temperature to less than 2°C compared to per-industrial levels. This target stands alongside the others Europe has already adopted for 2030 with regard to the climate and energy use: a reduction in greenhouse gas emissions of at least 40% compared to 1990 levels, use of renewable energy sources to provide at least 27% of all energy used and implementation of energy savings of at least 30% compared to the current scenario. According to the European Investment Bank calculations, good intentions alone will not be sufficient to achieve these aims: new investments of at least 180 billion Euro a year will be needed, rising to 270 billion if we also consider targets in the sectors of energy, transport, water and waste in general. "We should put our money into projects that are compatible with our decarbonisation objectives and the fight against climate change," states Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union, 

The financial sector will also benefit

A policy which supports the environment - which, in the final analysis, also means a policy supporting the 2030 Global Agenda and the 17 United Nations sustainable development goals - is beneficial not only for the health of our Planet but also for the economy and finance. Climate change threatens the Union's financial stability and causes huge economic damage: losses from extreme weather events rose by 86% from 2006 to 2016, reaching 110 billion Euro in 2017. What's more if we do not wake up in time to the challenges of climate change, many of today's financial investments could be wasted or fail to generate the expected returns. Last but not least, sustainable businesses offer a commercial opportunity which should not be underestimated. "The proposals the Commission is putting forward today will increase the transparency of sustainable finance and the investment opportunities it offers, so that investors have reliable information available to enable the transition to a low-carbon, resource-efficient and circular economy," stated Jyrki Katainen, Vice-President responsible for Jobs, Growth, Investment and Competitiveness. 

The actions being adopted

These are the main innovations of the new financial system proposed by the Commission, which places environmental, social and governance risks at the center of the investment process:

creation of a unified European Union classification system (taxonomy). The proposal sets basic criteria for determining whether an economic activity is environmentally-sustainable, also to enable investors to make more informed, aware decisions.

clear definition of investors' duties and disclosures. This introduces clarity and consistency on how environmental, social and governance factors are integrated in decision-making processes; 

creation of low-carbon benchmarks. These benchmarks will allow an investment portfolio to be better aligned with the Paris agreement objectives; 

advice to clients on sustainability. When assessing a customer's satisfaction with a specific product, firms should also consider sustainability preferences.  

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