A first version of this blog post was published on July 1st based on <\/span>a leaked draft<\/a><\/u> of the renewed sustainable finance strategy. It was updated on July 7th, following the publication of the final version of the strategy by the EU Commission.<\/span><\/i> On July 6th , the EU Commission published its communication on the <\/span>renewed sustainable finance strategy<\/a><\/u>. The documents (1) \u2013 accompanied by a proposal for a <\/span>European Green Bond Standard<\/a><\/u> (2) – largely confirms the fears of climate advocates: a sustainable taxonomy scheduled to be expanded to polluting activities, an emphasis on the scaling up of allegedly \u201csustainable\u201d activities instead of reducing support to polluting activities – including fossil fuels -, a continued reluctance to opt for strong mandatory rules… However, the renewed strategy also leaves a small space for meaningful changes in financial regulation, notably regarding climate risk integration and the actions of financial supervisors. Our analysis.<\/span><\/b><\/p>\n<\/div><\/div><\/div> The EU taxonomy still sinking<\/span><\/b><\/p>\n One of the first measures put forward in the renewed strategy is the broadening and extension of the <\/span><\/b>EU Taxonomy<\/u><\/span><\/b><\/a> <\/b>for climate mitigation and adaptation. As announced in its previous communication following the publication of the <\/span>first set of taxonomy delegated acts<\/span><\/a> in April 2021, and before developing the criteria to cover the remaining objectives of the taxonomy, the Commission plans to brand more activities as sustainable through:<\/span><\/p>\n By planning for fossil gas and nuclear inclusion, the EU Commission has hammered another nail in the coffin of a taxonomy that already welcomed <\/span><\/b>dangerous forest burning<\/a><\/u><\/span><\/b>.<\/span><\/b> If, unlike gas, the fate of nuclear is not certain, the <\/span>recent report<\/span><\/a> commissioned by the Commission to its own research committee suggests it will finally enter the taxonomy. Furthermore, propositions to open the taxonomy to activities not yet included but supposedly transitioning raise many questions and could allow for several polluting industries to benefit from the framework.<\/span><\/p>\n The failure of the EU<\/a><\/u> to establish a strong science-based taxonomy would be especially problematic for Europe<\/b>, as the EU Taxonomy will be used as a reference<\/a><\/u> for the proposed EU Green Bond Standard (EUGBS) and used in other European regulations, thus locking in support to polluting activities. But, it would also be a severe blow for the global development of sustainable finance<\/b>. Indeed, the renewed strategy clearly states the EU\u2019s intent to promote its taxonomy principles at the international level. Polluting activities still ignored<\/span><\/span>\u00a0<\/span> Much like the 2018 sustainable finance strategy, <\/span>the renewed strategy emphasizes the scaling up of green finance and puts aside the need to simultaneously scale down harmful activities<\/span><\/b>. The official goal is to build an \u201cinclusive\u201d system aiming at bridging a green investment gap evaluated at \u201c\u20ac350 billion additional investment per year over this decade\u201d for GHG reduction objectives in energy systems only, \u201calongside \u20ac130 billion for other environmental goals\u201d.<\/span><\/p>\n The EU Commission\u2019s \u201cgreen\u201d proposals – whether to favor green loans and mortgages, to create new labels and benchmark or to relax capital requirements for green activities \u2013 do not clearly contribute to reducing support to high carbon activities. <\/span>The EU Commission\u2019s choice to pair the renewed strategy with a proposal for a EU green bond standard and to make this proposal a key piece of its \u201csustainable finance\u201d communication<\/a><\/u> is a clear signal that priority has been given to the development of the \u201cgreen\u201d finance segment, and not to guide the whole financial system on a sustainable path.<\/b><\/span><\/span><\/p>\n It is worth noting that, if adequately implemented with a clear identification of polluting activities a few measures discussed in the renewed strategy could help mitigate this critical flaw. This is notably the case for establishing minimum sustainability standards for all financial instruments that contribute to the transition, creating a taxonomy for \u201csignificantly harmful activities\u201d or ensuring ESG ratings reflect the support given to polluting activities. However, recent <\/span>taxonomy developments<\/a><\/u><\/span> related to the inclusion of gas suggest these measures could define standards so weak that they won\u2019t contribute to overall sustainability and could even permit greenwashing by opening the door to polluting activities such as fossil fuels.<\/span><\/p>\n The only feature of the renewed strategy that directly addresses the issue of polluting activities is the Commission\u2019s upcoming report describing the provisions that would be required to cover economic activities that \u201csignificantly harm environmental sustainability\u201d. Unfortunately, it seems difficult to envision such a <\/span><\/span><\/span>\u201c<\/span>significantly harmful\u201d <\/span>taxonomy <\/span><\/a><\/span><\/span><\/u>while fossil fuels still have a place in the EU sustainable taxonomy. A blind bet on the good will of financial players<\/span><\/span>\u00a0<\/span> Despite evidence that EU financial institutions have continuously failed to align with climate objective, and have <\/span><\/b>even increased their support to fossil fuels<\/u><\/span><\/b><\/a>, the EU Commission continues to bet on their good will<\/span><\/b>. <\/span><\/p>\n A large majority of the measures of the renewed strategy deal with building new non-binding tools (such as benchmarks, taxonomies and labels). The Commission\u2019s flagship EU green bond standard<\/a><\/u> itself will remain voluntary. The few binding measures described pertain to disclosure, stress-testing or \u2013 to a lesser extent, later and with high uncertainty \u2013 risk integration. <\/b><\/span><\/p>\n As it is, nothing in the strategy forces financial players to adopt credible transition plans<\/b> and to redirect final flows from polluting activities to sustainable ones. In that regard, the Commission\u2019s stated objective to \u201creinforce science-based target setting, disclosure and monitoring of financial sector\u2019s commitments\u201d is critically insufficient and companies should be obliged to set paris-aligned climate targets and transition plans to meet them. EU hesitation on climate risks<\/span><\/b><\/p>\n While the renewed strategy addresses the climate risk issue, it falls short of promoting mandatory measures that would mitigate these risks. <\/span><\/p>\n When it comes to micro prudential regulation, <\/span>the only constraints imposed on financial institutions are stress-tests, risk analysis and disclosure<\/span><\/b>. These rather uncontroversial measures are a simple extension of current risk management practices. Furthermore, the efficiency of these measures is limited by:<\/span><\/p>\n If several impactful measures are discussed, regarding the adjustment of capital requirements through the CRR\/CRD and Solvency, their content remain highly uncertain tied to future additional work<\/b>. For example, it is not clear that the EBA and EIOPA\u2019s planned assessments of whether specific \u201cprudential treatment of exposures related to assets and activities associated substantially with environmental and\/or social objectives would be justified by 2023\u201d will concern activities that impair the transition<\/b>. Similarly, regarding macro prudential regulation, the Commission\u2019s intent to \u201cbroaden systemic risk considerations to other environment-related financial risks, cover non-bank financial intermediaries and assess where environmental exposures are unknown\u201d is welcome but tells us little about the actions envisioned. The Commission’s will to move forward on a \u00ab\u00a0green supporting factor\u00a0\u00bb – a feature strongly supported by the banking lobby – also leads us to question its objectives as \u00ab\u00a0polluting\u00a0\u00bb assets are much more relevant from a risk perspective.<\/b><\/p>\n Furthermore, <\/span>the timeline outlined for these potential risk integration measures is long, even though the riskiness of several activities \u2013 such as <\/span><\/b>fossil fuel production<\/a><\/u><\/span><\/b> \u2013 has already been clearly demonstrated<\/span><\/b>. The Commission\u2019s pledge to analyze how risk identified in stress tests will be integrated to macro and micro prudential regulation suggest such changes will not be considered before several years. <\/span><\/p>\n In a word, in the absence of strong capital requirement rules the measures put forward by the Commission will remain largely ineffective. <\/span>The EU Commission should adopt a <\/span><\/b>precautionary approach<\/a><\/u><\/span><\/b> to climate-related risk and <\/span><\/b>adapt capital requirements<\/a><\/u><\/span><\/b> to reflect the very high level of risks tied to the most polluting<\/span><\/b> \u2013 including fossil fuels \u2013 as soon as possible. <\/span>It cannot wait for climate risks to build up and climate change to deteriorate to act and already has ample information to do so<\/span><\/b>. The proposed update of EU supervisors\u2019 mandate could be used to implement such immediate measures.<\/span><\/p>\n The work proposed by the Commission on biodiversity-related risks is welcome but do not contain any measures that would help mitigate those risks and the related environmental harm in the short term. Much like for climate risks, the Commission\u2019s focus on methodologies may delay meaningful action and a precautionary approach to nature-related risks<\/a><\/u> should be followed<\/b>. Greenwashing<\/span>: a call for action<\/span><\/span>\u00a0<\/span> Addressing greenwashing seems to be the only area where the EU Commission recommends immediate action. The renewed strategy contains several measures that could help on that front, like guidelines for voluntary pledges, shareholder rights to better include sustainability issues, a European assessment of national authorities\u2019 work and tools, and minimum sustainability standards for financial products declared as sustainable. Of course, the impact of all these measures will largely depend on their final content, and notably on the fact that they center the end of support to climate destructive activities. Furthermore, several of these measures \u2013 including minimum sustainability standards for all alleged \u201csustainable\u201d products – are still at an exploratory stage.<\/span><\/p>\n Perhaps the most powerful tool put forward by the Commission to sanction greenwashing is the one that already exists. The renewed strategy indicates that \u201cNational Competent Authorities should make full use of their current legal mandates to address emerging issues and risks in the area of sustainable finance, including greenwashing. Member States may consider changing the legal mandates of National Competent Authorities in order to take into account sustainability-related factors when carrying out their tasks, in line with best practices.\u201d <\/span>This is a call to action: national supervisors already have the powers to identify and sanction greenwashing, they must make full use of them<\/span><\/b>
\n<\/span><\/span><\/b><\/p>\n1) The EU failing the sustainable finance challenge<\/u><\/span><\/span> <\/b><\/h1><\/span>
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\n<\/span><\/p>\n<\/div>2) Some room for hope<\/span><\/span> <\/u>
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