Regulate banks to fight climate change
Banks must be front and centre for Europe to mobilize its financial system in the fight against climate change.
Frontline: London's Canary Wharf
At the start of this year, a high-level expert group on sustainable finance provided recommendations to the European Commission as part of its effort to deliver the 40% cut in greenhouse gas emissions by 2030 agreed at the Paris conference in 2015.
The Commission recognizes that this may require €180 billion a year in additional investment and that the public sector alone cannot foot the bill. Rather, flows of private of capital must be reoriented.
The Commission has now developed a first series of legislative proposals set to start coming into effect next year. At the core of these proposals will be a new EU-wide classification system, or taxonomy, to give businesses and investors a common language to identify what economic activities can be considered environmentally sustainable.
The aim is to ensure that asset managers, institutional investors, insurance distributors and investment advisers include economic, social and governance (ESG) factors in their investment decisions and advisory processes, as part of their duty to act in the best interest of end investors or beneficiaries.
Missing the target
This may be a welcome first step, but it is hardly radical. And by focusing on securities markets and tying this all up with the stalled project for capital markets union, the Commission risks entirely missing the right target.
If Europe is to mobilize its financial system in the fight against climate change, then banks must be front and centre. The banks move Europe’s money, not the capital markets.
Indeed, the Commission’s own high-level experts recognize this and had some much bolder ideas than an EU-wide label for green investment funds and green bonds.
The experts suggested that there may well be a case for lowering bank regulatory capital requirements against loans to the green sector to promote bank lending to projects that reduce long-term environmental risks to the European economy.