What’s next in sustainable finance?

Hello. In this session, I will talk about what’s next in sustainable finance. In the previous session, I’ve talked about the EU Sustainable Finance Action Plan and how two of its main instruments, the EU taxonomy and the sustainable finance disclosure regulation, are creating new obligations for financial market participants. Now, how are these new instruments being introduced and what international developments are they leading to? Well, what is currently going on is that, in order to be able to report on the risks that are linked to sustainability, these financial market participants have to collect a whole set of new data.

They are used to reporting on the profit and loss on financial figures but they are not used to reporting on the carbon impact of their activities or their investments or on the impact on biodiversity or the issues about governance that their funds are or the investments are are facing and so non-financial data collection is one of the main activities that is going on now in the financial sector to be able to comply with these new rules on sustainable finance disclosure. Secondly, the regulators are preparing additional Acts to explain in great detail what this disclosure and non-financial reporting should look like, which templates should be used, what statements that are being asked in the regulation do need to conform with.

So, this is further explaining and giving guidance to financial market participants what is required from them under the Sustainable Finance Disclosure Regulation. A third evolution that we are seeing is the integration in the annual reporting and accounting because companies and banks and financial market participants are used to reporting about financial figures and are used to have their balance sheets audited by external auditors, but now they need to come up with a whole set of new figures on the sustainability impact that they are creating or that they are facing, and those figures also need to be verified by independent auditors.

So, this whole integration of new non-financial information into the standard financial reporting is creating a new set of activities, a new set of roles for auditors and the financial sector is preparing to do this. And, lastly, the Central Banks who are supervising the financial system also are running analyses and doing stress tests on the climate risks that financial institutions are facing and whether they are sufficiently prepared to withstand these financial risks, and so the Central Banks as financial system regulators are also integrating climate change into their prudential supervision. Those are the current activities that are going on now. What is happening on the international sphere?

Well, there Europe was the first to move with regulation into the sustainable finance action field, but a lot of regional blocks or countries or financial institutions are also looking spontaneously or voluntarily towards these new reporting obligations. And a number of these developments are the EIB who have decided to transform itself into a climate bank and for that they have developed a roadmap, what this means for its lending policy, for its reporting and so forth.

Secondly, internationally there’s been, under the supervision or the initiative of some very well-known financial people such as Bloomberg, there has been a task-force on climate related disclosures from the side of the financial institutions themselves to come up with reporting globally worldwide on climate risks and the risks that climate change is creating for our financial institutions. So, this is basically the financial sector itself taking the initiative to come up with rules that are not only applicable in the EU but worldwide.

The, thirdly, there’s a Network for Greening the Financial System, again, where the Central Banks are coming together and are discussing their role in assessing climate risks and are, under the responsibility that they have for the stability of the financial system, are integrating climate change into their analyses and so also Central Banks all over the world have come together and created written reports on how sustainable finance disclosure, on the use of taxonomies in the different jurisdictions, how that can be organized. Furthermore, there’s been an International Platform for Sustainable Finance in which the EU, China, India and another set of other countries are discussing respective taxonomies.

The EU was the first to create a legally binding taxonomy with legally binding definitions of what sustainable economic activities are, other countries have also done the exercise or have already created rules, but obviously for a global financial sector they would want the taxonomies to be more or less aligned all over the world and so this discussion is going on to see whether the taxonomies of the EU, China and others can be streamlined into a global system of taxonomies.

And, finally, something we have seen during the COP26 at Glasgow, is that the asset managers, so the managers who are managing the funds, pension funds or investments of financial consumers, how they have pledged to align their portfolios with the Paris Agreement, meaning that they would go to net zero by 2050.

And so this Net Zero Asset Manager Initiative is also a private sector initiative where the biggest financial institutions of the world are saying that they will rebalance their portfolios to be able to create the financial pressure on the companies to go to net zero and so that’s their way of contributing to the global sustainable finance evolution and their way of contributing to the Paris Agreement which aims at keeping climate change from entering into dangerous territory. To finalize this discussion, what is really going on here is that disclosure should be a means to achieve a more sustainable and inclusive capitalism.

That’s a quote by Larry Fink of BlackRock and what is this saying is that the financial sector itself, the financial market participants who have invested trillions into the economy are realizing that in order to save the system from irreversible climate change they need to act now and they need to disclose what their position is on climate change. Now, this agenda on disclosure, on taxonomy fits into the discussion of “just transition”.

We need to transition our economies from the fossil fuel-based economy to the renewable energy-based economy, but we need to do that in a just way and by just we meaning that it has to be socially equitable, people who are working in sectors that are at risk of climate change or that are at risk of the transition to a new renewable energy-based economy, that those are helped to get along into this transition.

Very concretely, coal regions, regions where a lot of coal is extracted, where people are working in the coal mines in order to dig up the coal to use in industry and for power generation, those regions need to be helped to be able to connect to the new economy in the future.

It’s a general principle of the Green Deal, there are plans being made to make sure that all these regions can also participate in the transition and not be the loser of it, there’s funds being gathered and there’s technical assistance being created, facilities being created to help those regions in transitioning to create new jobs in the new sectors and to make sure that this global agreement on avoiding irreversible climate change is not to the detriment of some people in some regions. And so, to wrap up, what are the key messages here on sustainable finance that I have covered over these sessions?

Well, the first is that really the twin goal of sustainable finance is to attract more sustainable investment, so making sure that capital is being reallocated in a way to align with the Paris Agreement, and to limit the greenwashing, to be sure that those who state that they are making sustainable investment that is also really true and that false claims are being avoided. Secondly, the EU has pioneered in this field of sustainable finance with science-based taxonomy and with financial market disclosure regulation and the EU was first to create legally binding obligations for financial market participants to adhere to these new principles.

And, thirdly, the EU is obviously not alone in the world and transnational networks and alliances are formed to create a green global financial system, and both from the private sector, from other countries, from international organizations and from the EU, the networks are being created in order to collectively align with those new principles of sustainable finance.