The question of how to put sustainability concerns at the heart of the financial system has been a hotly debated issue for some time now. Several years into the discussion, a solution for delivering transformative change still proves an elusive quest. The High-Level Expert Group (HLEG) on Sustainable Finance, established by the European Commission in early 2017 to help engineer a comprehensive EU-strategy on Sustainable Finance, strives to help deliver change by producing concrete operational and practical recommendations on how to transform the financial system.
In mid-July, a preliminary version of these recommendations was codified into an Interim Report dubbed Financing a Sustainable European Economy. Seeking stakeholder-feedback on the viability of these early recommendations, a questionnaire was prepared by HLEG, with the echo designed to help inform the crafting of the final recommendations. In tune with its mission to promote company transparency on climate change exposure and capitalizing on the occasion to apply itself to what is a very distinguished forum, Carbon Delta provided comments on the various aspects of the HLEG recommendations.
For sustainability to become a systemic feature, built into the very fabric of the EU financial markets, basic misincentives need to be addressed. The interim report touches upon many of these core impediments that have beset the transition to a low-carbon economy. Being a comparatively slow-moving phenomenon, climate change often seems to simmer without a singular moment of crisis, making it hard for investors to perceive its materiality. To ease the ill-alignment between investor short-termism and the long-term nature of climate change, the Interim Report has identified a number of necessary improvements:
- Craft a classification system for assets deemed sustainable
- Establish a standardized European label for green bond
- Infuse the set of fiduciary principles with sustainability-related concepts
- Render the ESG reporting requirements more stringent
- Infuse credit ratings more radically with sustainability-themed criteria
- Have new EU financial legislation undergo a sustainability test upon inception
- Create “Sustainable Infrastructure Europe”, a dedicated match-making facility designed to help sustainable public projects tap private investment pool
- Unlock investments in energy efficiency through relevant accounting rules
Weaving the above green finance suggestions into the EU financial markets and having the economy converge towards low-carbon growth is a delicate matter which requires extensive public consultation. Carbon Delta’s contribution to this stakeholder consultation process places special significance on the integration of relevant information for investors and integrated reporting. Several points raised in the submission are as follows:
- For private investment to weigh in and advance the low-carbon transition, adequate financial metrics informing investment decisions are needed
- More corporate transparency and data is imperative for the development and refinement of metrics to gauge company-level exposure to climate change
- Attempts at establishing an EU taxonomy for sustainable assets should be harmonized with green patent classification schemes for technologies
- To boost Sustainable Infrastructure Europe, the EU should help prepare and fund initial quality screening of proposed infrastructure projects, thereby minimizing the upfront costs and efforts that often deter potential investors
- Strong, unequivocal policy signals by the EU are crucial to align the investor community – which often is beholden to short-termism – with the more long-term nature of climate change.