New EU sustainable finance strategy to set the terms for impact investing in coming years

More transparency and clearer rules for investors are expected when the EU renews its sustainable finance strategy next week. Unless businesses are given real incentives to decarbonize, what investors can do remains limited, warns Eurosif.

“If you really want companies and investors to create a lot more green projects then a structurally higher carbon price might be as useful, and potentially even a more powerful signal to the market than the taxonomy,” Victor van Hoorn of Eurosif said. JuSun / iStock

In short

  • New EU sustainable finance strategy aims to increase the transparency and the integrity of green finance and thereby helping to avoid greenwashing.
  • The strategy plays a central role in mobilizing the billions of euros of private investments needed to meet the EU’s climate goals.
  • A structurally higher carbon price might be a more powerful signal to the market than the taxonomy to create more green projects accroding to the European Sustainable Investment Forum.

The EU summer is going green. In June the European Parliament gave its final endorsement to the new EU climate law which makes it legally binding for the EU to become emission neutral by 2050.

Now the European Commission is about to present two major propositions that will shape the playing field for impact investors in the years to come. Green investments are to be encouraged in several ways.

First up is a strategy for sustainable finance that the EU executive is to present on the 6th of July. The strategy will explore new ways to strengthen the green transition of finance and the corporate sector.

The aim of the measures is to increase the transparency and the integrity of green finance and thereby helping to avoid greenwashing.

Investors, financial institutions and business hope that the strategy will bring clarity to many of the unclarities and inconsistencies among the different EU legislative initiatives, such as the taxonomy regulation and the sustainable finance disclosure regulation (SFDR).

The strategy will play a central role in mobilizing the billions of euros of private investments needed to meet the EU’s climate goals, set out in the European Green Deal.

What to expect?

“I can assure you that the renewed strategy will be ambitious and comprehensive,” said Mairead McGuinness, the responsible EU Commissioner for Finance in a speech in November 2020.

While the details of the proposal are not yet public, the strategy is likely to support the development of the voluntary EU Green Bond Standard.

Such a standard should enhance the effectiveness and transparency of the green bond market. Labels for sustainable investment products may also be extended to loans and securitisation.

The strategy will probably also include ways to integrate climate risks into banks’ existing risk management practices.

More clarity needed

The strategy is expected to build further on the implementation of the EU taxonomy, the classification system for sustainable activities that was launched in April 2021. Stricter rules on corporate sustainability reporting, for example requiring companies more detailed reporting of their activities, is another possible action.

The social and governance components of ESG will not be forgotten in the strategy, according to Commissioner McGuinness.

“The COVID crisis reminds us that we cannot leave behind the social, the “S” of ESG. We want to make the social element more important in our strategy,” she said, mentioning a possible “social taxonomy”, and a Commission initiative on sustainable corporate governance.

Financial parties hope for more clarity and detailed policies. “Different countries and market participants are reading the regulation differently,” said Victor van Hoorn, executive director at the European Sustainable Investment Forum (Eurosif), the Brussels-based leading European membership association promoting social responsible investing.

“The current text is not very specific, there is lots of room for interpretation,” he told Impact Investor.

Data regulation and transparency

Better regulation of data suppliers is another point on Eurosif’s wish list. “All market actors in the sustainable finance sector need data providers to comply with the rules, whether it is the taxonomy, SFDR or climate modelling,” Van Hoorn told Impact Investor.

“The data providers are thus very important actors but currently largely outside the scope of regulations,” he said, flagging that is a problem for transparency. The methodologies used, the quality of the data are issues as well as potential conflict of interests, he noted.

To increase data transparency, the Commission will possibly propose the development of a free publicly available corporate data source – a service likely to serve investors in their investment decisions.
Better policy coordination with other sectors

More transparency, however, will not lead to sustainable investments at the scale and speed needed, according to Eurosif.

“Our main message to the Commission is that this version of the strategy needs to be much more coordinated with other sectoral strategies under the Green Deal. Unless other business sectors are given real incentives and price signals to decarbonize, what investors can do will remain limited”, warns Van Hoorn.

New EU climate legislation

In the second week of July, the Commission is expected to present a major package with new and reviewed key EU climate legislation. Legislation on renewable energy, CO2 standards for cars and the EU emission trading system (ETS) are part of the upcoming package.

Eurosif is pushing for one main point in the package: the review of the ETS needs to link to structurally higher CO2 prices.

“If you really want companies and investors to create a lot more green projects then a structurally higher carbon price might be as useful, and potentially even a more powerful signal to the market than the taxonomy,” Van Hoorn said.