Climate change and sustainable development are more and more present in policymaking.
Following the agreement of the Paris Climate Summit ( COP21) entering into force on the 4th November 2016 and the adoption by the United Nations of the Sustainable Development Goals (SDGs), establishing a framework for global public engagement in environmental and social matters, the EU has sped up its initiatives to include those challenges in its legislation.
As part of the Capital Market Union, on the 14th of September 2016, the European Commission announced the creation of a High-level expert group on Sustainable Finance. The expert group will provide, by the end of 2017, recommendations for a comprehensive EU strategy on sustainable finance to determine how to integrate sustainability considerations into the EU’s rules for the financial sector.
The European Commission also proposed an extension of the duration of the European Fund for Strategic Investment (one of the 3 pillars of the Investment Plan for Europe which helps to finance strategic investments in key areas such as infrastructure, research and innovation, education, renewable energy and energy efficiency as well as risk finance for small and medium-sized enterprises).
On the 22nd of December 2017, the European Commission released a Communication in which the Commission states that one of the priorities in the implementation of the 2030 agenda is to fully integrate the SDGs in the European policy Framework.
At the national level, some Member States have adopted laws introducing the obligation for investors investment managers to disclose how they integrate ESG (environmental, social and governance) criteria and climate change-related risk aspects into their investment policies.
On the 25th of April, the European Parliamentary Financial Services Forum (EPFSF) organized an event on “Capital Market Union: Sustainable Finance Chapter”.
The main question raised during the EPFSF meeting was “how to fund efforts to implement the Paris Agreement, how to fund the 2030 Agenda for Sustainable Development and how to mitigate the risks related to the transition to a lower-carbon economy which may pose varying levels of financial and reputational risk to operations.”
Speaking at this event, Guillaume Prache, Managing Director at BETTER FINANCE, raised several points that should be considered in order to support sustainable and social development.
• An international definition: We need an international definition of these concepts (SDGs, ESGs, SRI…).
• Provide reliable long-term investment opportunities for individual investors: Individual investors are looking for long-term investment products. However, following the economic and financial crisis, they remain wary of financial products. There is a clear problem of trust from citizens.
• More transparency and disclosure
The transition to a low-carbon economy will also have a price: €1 trillion a year estimated for Europe. But “this is not just about money” said Ugo Bassi, Director Financial Markets at the European Commission at the Friends of Europe event on the 25th of April. “This is something that requires also a change of culture”.
Investments firms are aware of this new “trend”. In partnership with the International Finance Corporation (the private arm of the World Bank Group), Amundi has launched a $2bn emerging market green bond fund. This fund will buy green bonds issued in banks in Africa, Asia, the Middle East, Latin America, Eastern Europe, and Central Asia. Interviewed by Investment and Pensions Europe, the International Finance Corporation (IFC) declared that “this green bond fund will lower the risk for the private sector and attract new investors- essentially creating a market where there was none” and added that “(…) this asset class represents an attractive risk-return profile for investors and can also benefit from a very favourable Solvency II profile”.
But Green bonds are not the only answer. Speaking at the Friends of Europe event, Ingrid Holmes, member of the High-level expert group for Sustainable Finance underlined that there are others ways to support the shift to a low-carbon economy: fiduciary duties, disclosures and capital requirements… could make green investments more attractive.
Read the Investment and Pension Europe article here