Investing for sustainability

What exactly is sustainable finance?

In broad terms, sustainable finance is about reorienting and scaling up investments that contribute to meeting sustainability objectives. Green finance is a part of sustainable finance and refers to investments that contribute to meeting the environmental policy objectives on sustainability. Boosting green finance is important because meeting environmental objectives is to large extent an investment challenge.

Factoring in environmental, social and governance dimensions throughout the investment chain will help redirect capital towards longer-term more sustainable activities. It will also help identify and manage potential systemic risks for financial stability.

How big are the investment needs?

It is often difficult to translate targets, policies and measures directly into investment needs but there are some estimates.  For instance, there are estimates that about EUR 1 trillion worth of investments are needed, annually, from 2021 onwards, to meet the EU’s 2030 climate and energy targets. The forward-looking investment gap — how much we are short of that EUR 1 trillion — is estimated to be about EUR 180 billion per year. It is important to bear in mind that these are not costs but productive investments with expected returns and multiple co-benefits. The United Nations has estimated that achieving the global Sustainable Development Goals would require about USD 5-7 trillion worth of investments with an investment gap of about USD 2.5 trillion in developing countries.

Closing these investment gaps are far beyond the capacity of the public sector alone, which is why tapping into the vast capacity of financial markets is a necessity.  We need to find new ways to help and incentivize investors to direct capital in a way that we can close this gap. More and better sustainable finance will be critical for reaching the long-term environment and climate goals.

What is the EU doing now to promote sustainable finance?

Many public and private actors have been working in the area of green and sustainable finance within the EU so the concept is not new. What is new is the rapidly increasing political momentum and the need for more structured policy support. There is an increasingly broad agreement that changes in the financial system are pivotal for Europe to meet its sustainability objectives and to safeguard financial stability. Also, a clear and predictable framework for sustainable finance will help making the EU a more attractive destination for green investments. 

The European Commission has been a key player for these developments and has recently launched the first batch of legislative proposals on sustainable finance. These proposals will now go through the normal legislative process in the EU. At the same time, a dedicated expert group will start working on underpinning technical aspects of the legal proposals, including developing the initial categories and criteria for sustainable investments.

What are the issues the EU needs to tackle to strengthen sustainable finance?

There is no single lever that can be pulled. Instead, there is a broad spectrum of issues that need to be addressed over a period of time. Both the European Commission’s action plan on financing sustainable growth and the final report of the High-Level Expert Group (HLEG) on Sustainable Finance highlight some of the most important ones.

One of the key issues identified by the Commission and HLEG is the need to establish an EU-wide classification system for sustainable activities. This system would help define which economic activities should be invested in, and under what conditions, to make a tangible contribution to specific environmental objectives, such as climate change mitigation or protecting ecosystems. This is an ambitious but also a very challenging task, which will require expertise from many disciplines. The classification system needs to have technical rigour but it should also not become too complex. It should enable the financial system to act on it in an effective way.

Why is the classification system for sustainable investments so important?

An EU-wide classification system would complement existing sectoral and thematic policies to strengthen policy certainty for investors.

Today, there are several national and market-based approaches but no EU-wide system that covers all key environmental objectives in a uniform way, clarifying what constitutes an environmentally sustainable investment. This lack of harmonisation is a source of uncertainty for investors and hinders the development of single market for sustainable investments. Moreover, defining common technically rigorous criteria in an EU-wide system would reduce the risk of potential greenwashing of financial products in the market.

What do these rapid developments in sustainable finance mean for the EEA?

The EEA will continue to engage in the EU policy process around sustainable finance. In the short term, the EEA will support the work of the Commission’s technical expert group.

In the long term, the EEA’s role depends on the outcome of the legislative process as well as on resource availability. In the Commission’s recent proposal, the EEA is presented as part of a long-term public-private platform on sustainable finance. The platform would assist and advice the Commission, mainly on topics related to the EU-wide taxonomy for sustainable activities. As part of the platform, the EEA would cooperate closely with other public bodies, such as the European Investment Bank, the three European Supervisory Authorities and the European Investment Fund.

I think the connection between environment and financial policy will be stronger in the future, with mutual benefits. For the vast majority of environmental challenges ahead of us there is a very strong investment link. Providing a clear, stable and actionable policy framework is key to successfully financing those investments.

Andreas Barkman

Strategic advice on climate change and energy, EEA