European Developments in Sustainable Finance


European Developments in Sustainable Finance

The Paris Agreement of December 2015 signalled an international intention to mitigate climate change and attempt to contain the global temperature rise. To have any chance of achieving these targets, investment in clean energy and increased energy efficiency must be stepped up.

To put this into perspective, Carbon Brief estimated that to meet environmental demands and contain the rise in global temperature, investment into clean energy would need to be 50% higher. The IEA further enforces this by stating that investment in energy efficiency (currently about $270 billion a year) would need to double between 2017 and 2025, and then double again between 2025 to 2040. And if you need any more persuading that energy needs investment, The European Commission also reflected on the increased demand for investment, stating that to achieve its energy and climate goals, it would require an additional investment of €170 billion per annum.

So how is Europe approaching the need to steer more investment into clean energy and energy efficiency, alongside wider sustainability objectives? Well, in 2016, the EC convened the High Level Expert Group (HLEG) on Sustainable Finance to provide advice on how to ‘steer the flow of capital towards sustainable investment; identify steps that financial institutions and supervisors should take to protect the financial system from sustainability risks; and deploy those policies on a pan-European scale. The HLEG met from December 2016 to December 2017 and its report made the following recommendations:

• Introduce a common sustainable finance taxonomy to ensure market consistency and clarity, starting with climate change.

• Clarify investor duties to extend time horizons and bring greater focus on ESG factors.

• Upgrade Europe’s disclosure rules to make climate change risks and opportunities fully transparent.

• Empower and connect Europe’s citizens with sustainable finance issues.

• Develop official European sustainable finance standards, starting with one on green bonds.

• Establish a ‘Sustainable Infrastructure Europe’ facility 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.

The report was followed quickly by the Commission publishing an Action Plan on Sustainable Finance in March 2018. This included:

• Establishing a common language for sustainable finance, i.e. a unified EU classification system – or taxonomy – to define what is sustainable and identify areas where sustainable investment can make the biggest impact.

• Creating EU labels for green financial products on the basis of this EU classification system.

• Clarifying the duty of asset managers and institutional investors to take sustainability into account in the investment process and enhance disclosure requirements.

• Requiring insurance and investment firms to advise clients on the basis of their preferences on sustainability.

• Incorporating sustainability in prudential requirements

• Enhancing transparency in corporate reporting.

The Commission also published three legislative proposals covering the taxonomy, disclosure and duties and benchmarks. Then in July 2018 Commission then convened the Technical Expert Group (TEG) to assist the Commission in developing:

• an EU classification system – the taxonomy – to determine whether an economic activity is environmentally sustainable

• an EU Green Bond Standard

• benchmarks for low-carbon investment strategies

• guidance to improve corporate disclosure of climate-related information

At Cameron Barney, we strongly support these proposals and expect our clients to be actively pursuing strategies that positively contribute to the environment. We’re always excited to collaborate with businesses that are looking to develop sustainable energy infrastructure and solutions across the UK, and offer advice and capital to enable positive growth in the energy sector. There’s a huge amount of work to be done to improve energy solutions that we currently have, but these European developments are paving the route to a brighter future.

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