What will come next from the EU after the green taxonomy, SFDR and green labelling? Martin Spolc, head of the Sustainable Finance Unit at the Commission’s DG FISMA revealed a six-point roadmap designed to take ESG to the next level at Luxembourg for Finance’s Sustainable Finance Forum on 28 October.
Financial services professionals are currently grappling with the early manifestations of new sustainable reporting standards, labelling and the green taxonomy, and substantial work is needed to fine tune these innovative procedures. Nevertheless, the European Commission is already looking to what will come afterwards. A public consultation over the spring and summer yielded around 650 responses that Spolc said have been articulated into six broad policy themes. The Commission will go into greater detail when these proposals are announced next month.
‘First, we need to shift the mindset from greening finance to financing green; and ensuring that the financial sector can support businesses with their sustainability transition pathways,’ said Spolc. In other words, the aim will be to encourage more impact finance: investment which actively promotes the provision of goods and services that do not degrade the environment. This compares to much of current green investing activity which is about avoiding companies and activities which do the most harm.
The second goal will be related to the post-Covid recovery phase, which will feature substantial state funding, particularly directly from EU. ‘We need to better align private frameworks for sustainable finance with the tools that the public sector is using, and ensure that this money incentivises the private sector to steer the action in the right direction,’ Spolc said. For example, he cited the standards governing green bond issuance that can be used by the public sector for its own debt issuance.
Social and governance too
Next, the Commission wants to drive investment and best practice in the other dimensions of sustainability: namely social objectives and governance issues. ‘We are now exploring whether the taxonomy could and should be extended to social objectives,’ he said. As for governance, ‘the European Commission already announced an important initiative on this for next year,’ he said, referring to the sustainable corporate governance initiative which is currently in its public consultation phase.
Fourthly, the EU has set 2050 as the deadline for achieving climate neutrality, with related energy and climate ambitions fixed for 2030. ‘We need to articulate better how we can translate these big targets into action, and what it means for all companies, not just the financial sector,’ Spolc said.
‘The fifth challenge is about resilience,’ he said. ‘Not only do we need to attend to the risks that individual institutions are facing, but also to the risks that confront whole systems, and the resilience they need to have.’ He alluded to the current coronavirus crisis as an example of how more could have been done in preparation to make the financial sector and the real economy better able to adapt to stress.
EU action as a global standard
The final challenge is to take a global perspective. ‘We are very confident that we will reach our ambitious targets, but Europe only accounts for 10% of global emissions,’ he said. ‘We need to find ways to accelerate this positive development not only in the European Union, but in other countries.’ Part of this is already underway, with the Commission having founded last year the International Platform on Sustainable Finance, which brings together decision makers from key jurisdictions to exchange experience of policy and market practice.
These are the outlines of ambitions over the medium to long term, but there are also initiatives due to be launched in the coming months. Spolc pointed to the work to ensure existing rules are most effective. ‘We need to work with experts from across business, not just the financial sector, and academia and NGOs. We need to understand the different economic sectors and the relevant scientific expertise,’ he said. A formal discussion forum has been created to work over the coming years ‘to make sure that the taxonomy is workable and usable on the ground, and then expanded beyond environmental objectives.’ There is also the upcoming review of the non-financial reporting directive, which will incorporate sustainability norms into corporate disclosure.
Underlying this work is a belief in ‘a very strong partnership between the public and private sector,’ Spolc said. Like with the current initiatives being rolled out, he said the methodology would be to set standards, rather than prescriptive rules. The goal is to encourage the mobilisation of capital and entrepreneurship towards the achievement of sustainability.
The ultimate goal is to make EU action a global standard for how public action can harness the power of private enterprise. ‘The legislative tsunami has to be seen by stakeholders as a positive tool that is making a useful contribution, rather than being merely a regulatory burden,’ he said.