Financing industry gears up to bankroll a more sustainable future

Emmanuel Macron, Valdis Dombrovskis and Michael Bloomberg

A version of this article first appeared on The Fifth Estate website on 27 March.

Efforts to close the urban green investment gap need to be urgently scaled up to provide access to technical support and financing for low-carbon infrastructure for thousands of cities, the European Union’s High Level Conference on Sustainable Finance has heard.

The conference saw a first-of-its-kind call made by a powerhouse of individuals and bodies: French president Emmanuel Macron; the Global Covenant of Mayors; Michael Bloomberg, philanthropic financier, former NYC mayor and UN climate change special envoy; European Commission vice-president for the Energy Union Maroš Šef?ovi?, the presidents of the European Investment Bank; the European Bank for Reconstruction and Development and the World Bank Group.

The aim is to raise awareness among local authorities, civil society organisations, businesses, private investors and philanthropies about the investment needs for climate action in urban areas and the available financing solutions; and to provide dedicated advisory services and foster the financing of urban climate action projects.

European Commission vice-president for financial stability Valdis Dombrovskis said: “There are two reasons why we should climate-proof our investments, and foster a broader view of risks: first, the impact of climate change can threaten financial stability and lead to major economic losses through floods, land erosion or draughts. And second, because of the risk of stranded assets. If we wake up too late to the reality of global warming, many of today’s investments could end up being redundant.”

Three months ago, at the One Planet Summit hosted by President Macron, Global Urbis was launched, which is a global initiative to provide cities with financing and technical assistance to mobilise private capital. Urbis is a dedicated advisory platform for investment support to cities. The call for interest will be piloted at the Global Climate Action Summit in San Francisco in September this year.

The European Commission’s Sustainable Finance Action Plan, meanwhile, will make it easier to meet the estimated €180 billion (AU$289b) a year price tag for achieving the EU’s climate goals – an investment requirement that rises to €270b (AU$434b) if energy, transport, water and waste sector are also included. The plan comes hot on the heels of a call from top European financiers to the EU to get radical on financing green projects.

The EU’s climate and energy targets are by 2030 to reach a minimum 40 per cent cut in greenhouse gas emissions compared to 1990, at least 30 per cent (pending finalisation) energy savings compared with business-as-usual, and at least a 27 per cent share of renewables in final energy consumption.

Meeting the challenge

With over €100 trillion (AU$161t) in assets, the financial sector must be part of the solution. There is huge potential for green investments. However, the EU has recognised that engaging private finance requires systemic changes to its own financial eco-system.

Following the engagement of a high-level expert group, the plans announced are for far-reaching reform to its system, reform that Mr Dombrovskis said at the launch “could set the global benchmark for sustainable finance… to support a sustainable future for generations to come”.

The Commission will also establish a new single investment fund to provide financial support for sustainable investment for all EU policies.

The action plan will address five key challenges to the provision of sustainable finance:

• there is no common definition of sustainable investment, and so a universal classification for sustainable activities will be developed
• to avoid a risk of “greenwashing” by banks of existing or other investment products, standard labels between financial products will be established to give investors certainty
• to stop banks and insurers giving insufficient consideration to climate and environmental risks there will be a study to discover if capital requirements should reflect exposure to climate change and such risks
• to reduce the likelihood that investors might disregard sustainability factors or underestimate their impact, the duties of institutions will be clarified to make sure they consider environmental, social and governance (ESG) issues in their investment decision processes and are more transparent towards their clients
• to address the fact that too little information is often provided to shareholders on corporate sustainability-related activities there will be efforts to encourage non-financial information disclosure in company reports.

In total, these amount to the provision of more reliable information for investors, sustainability and risk management.

Furthermore, to combat short-termism in investment decisions, the Commission is inviting the European Financial Supervisory Authorities to collect evidence of undue short-term pressures in capital markets on corporations and consider whether steps need to be taken to combat these.

Green bonds and ecolabels

Most of this work will take about a year and so by the third quarter of 2019 the European Commission is expected to adopt acts on the content of the prospectus for issuing green bonds and produce an EU ecolabel for financial products based on the previous highly successful EU organic label and the EU product eco label.

It will also provide benchmarks for institutional investors and asset managers that are harmonised across the EU and a list of measures to be taken to require greater disclosure of non-financial information in company reports and to incorporate sustainability in prudential requirements.

An EU sustainable taxonomy would mean a uniform and harmonised classification system for green investment. This is seen as essential to determine which activities can be regarded as sustainable across the EU and to strengthen banks against economic shocks, improve risk management and ultimately ensure financial stability.

It would provide appropriate signals to economic players on which activities are considered sustainable.

This will all help to create certainty for investors who want to invest with sustainability objectives in mind.

The European Investment Advisory Hub – the EU’s gateway to investment support – is providing technical assistance to the development of projects. This helps to build capacity for projects that are often technologically, economically and legally complex. It also has a role co-operating with local partners such as promotional banks across member states to provide more match-making and increase local accessibility.

David Thorpe’s two new books are Passive Solar Architecture Pocket Reference and Solar Energy Pocket Reference. He’s also the author of Energy Management in Building and Sustainable Home Refurbishment.