Market participants have welcomed the European Commission's new sustainable finance strategy and green bond proposal for closing gaps from the original plan in 2018.
Commissioner Mairead McGuinness said in a press conference that there are four pillars to the strategy - transition, inclusiveness, resilience and the global perspective.
“We want more support for the intermediate steps,” McGuinness added. “For example, we are considering an intermediate taxonomy to complement the existing green taxonomy – and this would allow us to develop transition bonds.”
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The Association for Financial Markets in Europe said a broader, more flexible approach to classifying transition activities would go a long way to helping to accelerate Europe’s pathway to achieving net-zero carbon emissions by 2050 and welcomed better recognition of investments for intermediary steps in the renewed strategy.
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Adam Farkas, chief executive of AFME, said in a statement that 35% of the funding needed to meet the Paris Agreement is required from equity, alongside 44% from loans and 21% in bonds. He added: “While the markets for green bonds have seen significant growth in Europe, climate finance needs to scale across all asset classes.”
McGuiness believes the European Union will set a gold standard in the green bond market.
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She said about half of global issuance last year took place in the EU and are denominated in euros, making it the most popular currency for green bonds.
“We believe we can do more to support green bonds, which only represent 2% to 4% of the overall bond market,” McGuiness added. “So, the capacity to expand this is significant.”
Naïm Abou-Jaoudé, president of the European Fund and Asset Management Association, said in a statement: “The renewed strategy is rightfully addressing these policy gaps and should ensure it works in harmony with the existing policy instruments.”
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EFAMA strongly supported three policy actions in the renewed strategy - enhancing the reliability and comparability of ESG ratings; ensuring consistent integration of the double materiality perspective; and ensuring consistent integration of the double materiality perspective.
The FIA European Principal Traders Association (FIA EPTA), representing Europe’s leading non-bank market makers and liquidity providers, welcomed the EU Commission’s sustainable finance strategy.
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In June 2021 FIA EPTA published its new principles on sustainable finance and ESG to clarify how market makers and liquidity providers can contribute to achieving Europe’s sustainable finance goals.
For example, FIA EPTA members will aim - or continue - to integrate sustainable products into the suite of products for which they are providing liquidity and work to improve price discovery and price formation of ESG products.
Annabel Ross, senior programme manager for Cambridge Institute for Sustainability Leadership’s banking environment initiative, said in a statement: “The EU’s new strategy for financing the transition to a sustainable economy reflects the wide-ranging interdependencies for consideration as banks seek to accelerate progress in integrating climate and environmental factors into risk management systems and financial innovation. The proposed engagement, advisory and financial support to small and medium-sized enterprises (SMEs) is welcomed, contributing towards more inclusive sustainable finance that supports a green recovery.”
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Lucy Auden, senior programme manager for CISL’s investment leaders group, said in a statement: “Greater focus on the impacts of investment on society, highlighted by the pandemic, have underscored the urgent need for standardisation on how investors categorise their impact and dependencies on social issues. We welcome the proposed social taxonomy by 2021 and clarification on social issues by 2022 as the group thinks about how investors can deliver sustainable investment passed the delivery of a low carbon future.”
The UN-supported Principles for Responsible Investment said it supported this new ambitious strategy, which further strengthens the EU’s sustainable finance policy framework and sets a clear policy agenda for 2021-2024.
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PRI highlighted that the EU has followed through on most of the measures announced in its original 2018 action plan, notably a classification system of sustainable activities (EU Taxonomy), a disclosure regime for financial and non-financial companies (SFDR and CSRD) and tools to help investors contribute to the EU’s climate goals (EU Climate Benchmark Regulation and EU Green Bond Standard).
“These are important and ambitious steps, and investors and companies will need time to understand and fully implement the new requirements,” added PRI. “The EU’s new strategy aims to build on this foundation by introducing additional measures to align financial flows with the EU’s ambitious new sustainability objectives, including a reduction of greenhouse gas emissions of 55% by 2030 (compared to 1990 levels).”
PRI also noted that it supports the announcement to clarify investors and pension funds’ fiduciary duties to take into account sustainability outcomes.
“Expectations to minimise harms and substantially contribute to environmental and social goals through capital allocation are ever increasing,” added PRI. "Clarifying investor duties is therefore an essential step to ensure investors are able to fully integrate sustainability outcomes (both positive and negative) systematically into their investment strategies.”
Inger Andersen, UN Environment Programme Finance Initiative’s executive director, said the timing of the EU strategy could not be better, ahead of November’s Climate COP26.
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“The regulatory and voluntary efforts to integrate sustainability into financial institutions led by the EU are setting an example to the rest of the world and we expect to see EU policy reflected in global discussions and spilling over to other regions and jurisdictions,” added Anderson.
Antoni Ballabriga, head of responsible business at BBVA, co-chair of UNEP FI’s global steering committee said in a statement: “European financial institutions involved in the work of UNEP FI are supportive of the EU’s agenda. We especially welcome the support of the transition of the whole economy, improving the financial sector’s resilience and contribution to sustainability and fostering global ambition.”
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The International Securities Lending Association said it is reviewing the strategy to understand elements that may be applicable to the securities lending industry, a review of which will be provided in the next ISLA ESG Steering Group meeting on 13 July.
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SEC
The Securities and Exchange Commission released its annual regulatory agenda in June this year. The US regulator said notable proposed and final rulemaking areas include “disclosure relating to climate risk, human capital, including workforce diversity and corporate board diversity, and cybersecurity risk.”
Commissioner Allison Herren Lee said in a speech at the 2021 Society for Corporate Governance National Conference in June that the SEC had received thousands of comments in response to its request for public input on climate change disclosures.
Lee added: “We hardly need that statistic to understand that the subject of climate risk and our financial markets, and ESG more broadly, is top of mind in board rooms and c-suites around the globe.”
She continued that the understanding of the significance of ESG and its short-, medium- and long-term relationship to financial performance has evolved to the point that the principal debates are about “when, not if” these issues are material and there is tremendous and growing investor demand for climate and ESG disclosure.
Lee concluded that public pledges on ESG issues need to be backed up by corporate action.
“It’s more critical than ever for boards to explore how to integrate sustainability into their governance practices, and consider specifically what is best for the companies they oversee,” she added. “That’s because (if you’ll forgive me one last quote), as Yogi Berra put it, 'if you don’t know where you are going, you might wind up someplace else'.”
Eric Pan, president and chief executive of the Investment Company Institute, welcomed the SEC’s sharper focus on climate disclosure but said in a blog that the Commission’s work in this space is only just beginning.
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For example, the G7 countries recently announced their support for “moving towards mandatory climate-related financial disclosures that provide consistent and decision-useful information for market participants.”
Pan said clearer and more useful information about public companies’ climate-related activities will help investors direct their investment capital to companies that are pursuing projects consistent with the transition to a lower-carbon economy.
“But pledging support is one thing, and taking action is quite another,” Pan added. “Enhancing climate-related financial disclosure means developing, refining, and implementing a wide range of policymaking initiatives—not just in international fora, but at the national level as well.”