Interview — A sustainable finance system, what is it for?

What does sustainable finance mean for the EU in terms of putting it into practice?

The investments needed for financing the transition of the EU economy to a climate-neutral, climate-resilient, resource-efficient and fair economy are far beyond the capacity of governments and taxpayers alone. That is why the EU has come up with a sustainable finance policy that will be key for mobilising, scaling up and channelling private investment in more sustainable technologies and businesses and for financing economic growth in a sustainable manner in the long term.

Sustainable finance has a key role to play in helping to deliver on the policy objectives under the European Green Deal as well as the EU’s international commitments to climate and sustainability objectives.

In sustainable finance, we take environmental, social and governance considerations into account when making decisions to invest. Environmental considerations include whether the investments would preserve biodiversity, prevent pollution, boost the circular economy or help climate change mitigation and adaptation. Other considerations include human rights issues, labour relations and investment in communities.

So, what the policy aims to do is encourage and facilitate investments that contribute substantially to environmental objectives and promote wider sustainability objectives. A sustainable finance policy is needed both to transition the financial sector towards being more sustainable itself and to improve the financing of the economy’s transition towards sustainability. 

How far along is the EU in putting in place sustainable finance rules for investors?

The EU has put significant efforts into developing the landscape of the sustainable finance policy, including legal and non-legal policy actions stemming from the 2018 Action Plan on financing sustainable growth and the 2021 Sustainable Finance Strategy under the European Green Deal.

Key legislation, such as the Taxonomy Regulation, the Sustainable Finance Disclosure Regulation and the EU Climate Benchmarks Regulation, has already been put in place as part of the action plan on sustainable finance.

What do the rules and regulations do?

The EU’s sustainable finance policy package does a lot, and in many ways it is leading the way. The EU is trying to take a broad approach to sustainable finance that addresses key intervention points and can substantially change how the financial system supports sustainability. Rules and regulations focus on a range of different actors, financial products and instruments.

One of the common threads is the enhanced disclosure of the performance of financial and non-financial undertakings and financial products in terms of their degree of environmental sustainability, exposure to sustainability risks and so on — in other words, using more transparency as an engine for change, so that everyone can see which investments are sustainable and helping to reduce the risk of greenwashing.

What is the EEA’s role in ensuring a sustainable finance system?

The EEA has contributed to the design of EU sustainable finance policy through active participation in and input to a number of expert groups assisting the European Commission in its work on the Action Plan on sustainable finance and its components such as the EU taxonomy. The EEA is a permanent member of the Platform on Sustainable Finance, formed under the EU Taxonomy Regulation advising the Commission, and also acts as an adviser on specific topics related to the Sustainable Finance Disclosure Regulation.

The EEA was engaged in the High-Level Expert Group on Sustainable Finance 2016-2018, which provided key input to the action plan in 2018, and in developing the EU taxonomy for sustainable activities by participating in the Technical Expert Group on Sustainable Finance (during 2018-2020). It has been a permanent member of the Platform on Sustainable Finance since 2020.

The EEA will continue to be active in helping policy developments aimed at redirecting capital flows into sustainable activities by supporting a range of EU policy processes including the reporting standards under the Corporate Sustainability Reporting Directive.

Can you explain what the EU taxonomy is and how it will work?

The taxonomy defines the conditions under which an economic activity can be deemed environmentally sustainable. It defines the technical criteria on environmental performance levels and social minimum safeguards for a list of activities that must be fulfilled if they are to be legally classified as environmentally sustainable.

The taxonomy is primarily about disclosure, whereby companies covered by the EU Corporate Sustainability Reporting Directive will need to disclose how carrying out their economic activities fulfils the taxonomy criteria and what proportion of their activities can be deemed environmentally sustainable. The disclosure requirements also apply to upcoming investments by those companies.

For example, banks will need to disclose their Green Asset Ratio, which indicates the proportion of assets invested in taxonomy-aligned economic activities relative to their total assets. The taxonomy will also affect disclosures of financial products and give rise to new financial products with sustainability features.

How will we know if Europe’s investment sector shifts to more green investments and moves away from fossil fuel-based industries and sectors?

One of the key objectives of sustainable finance is to help reorient capital flows towards more sustainable economic activities, and the monitoring of those capital flows will become increasingly important as an indicator of whether the system is indeed becoming more sustainable.

Under the 2021 sustainable finance strategy the European Commission will develop a robust monitoring framework in cooperation with the Platform on Sustainable Finance and EU financial regulators. This work is to begin in 2023.

How do the EU’s efforts on sustainable finance compare with similar action taken in other regions and countries?

The EU is the frontrunner internationally when it comes to setting up a comprehensive sustainable finance policy framework. In this way, the EU also influences other actors, given the international nature of financial markets. and intense cooperation with non-EU jurisdictions is taking place, for example, under the G20 umbrella and the International Platform on Sustainable Finance.

Can we ever achieve a 100% sustainable finance system? Is that realistic?

A fully sustainable finance system is dependent on an economy that is fully sustainable and vice versa. Neither of these is currently the case. The interplay between policies aimed at the real economy and policies aimed at the financial system will be critical to ensuring that we shift to more sustainability on all fronts.

As with many other things, the financial system is truly global in nature and so other regions and countries must also play their part to green their economies. Achieving full sustainability remains a huge challenge, but striving towards higher levels of sustainability across the economy is a must in view of the climate and environmental challenges we face.

Andreas Barkman

EEA expert on sustainable finance