When worlds collide: nature and finance

August 16, 2021

By Mairead McGuinness

Commissioner for Financial Services, Financial Stability and Capital Markets Union at the European Commission

IMAGE: Martin Lahousse

Financial stability is at the core of the decisions that financial regulators take.


The 2008 crisis is not far from collective memory and we have seen that, through stronger regulation, the COVID crisis, which we are slowly emerging from, has not led to a financial crisis.


Yet we must also be prepared for new threats to financial stability. Climate change is one such threat.


For our economic and financial system, climate change presents physical risks like droughts, fires, flooding – or indeed another pandemic.


And it presents transition risks as we move to a low-carbon economy: for example, risks to banks or investors if there is a sudden collapse in the price of fossil fuels.


Climate risks are financial risks.


We have to manage the transition to climate neutrality very carefully. We need swift action as the risk of any delays could see our economies and societies hit by climate catastrophes.


We must also manage the impact of this change on asset prices on balance sheets – a significant asset devaluation could lead to a financial crisis.


It is our job as policy-makers to manage the transition process. We must ensure that private money is channelled towards sectors that are more sustainable.


Markets are calling for guidance: they are ready to transition to sustainability, but want to have reliable, comparable sustainability information, to avoid greenwashing (claiming to be green, when in reality you are not) and trust what they invest in.


Of course, all this is easier said than done. Our first step should be to make sure we all speak the same language when it comes to what is considered ‘sustainable’ and what is not.

This is why we developed the EU Taxonomy: a list of economic activities that can be considered sustainable, based on scientific data. This is not a mandatory list of what investors must invest in; investors maintain the freedom to invest in whatever they want. But with the Taxonomy we have clear criteria to call an investment sustainable for the climate or not, to meet the market’s huge appetite for sustainable investments.


It is often not clear how sustainable financial products are, given their complexity. So another priority is to provide this clarity. The Sustainable Finance Disclosure Regulation and the new proposed Corporate Sustainability Reporting Directive provide a framework requiring companies (both inside and outside the financial sector) to disclose information about the sustainability of their activities. Based on this information, investors can then make informed choices.


What we are developing next is a set of standards and labels, so that it will be easier to recognise sustainable investments. There will be no need to go digging in companies’ annual reports – these standards and labels will provide clear signals. The European Green Bond Standard that we have proposed is a good example. Any company can call a newly issued bond ‘green’. Subject to agreement by the European Parliament and EU Member States, we will have a voluntary EU standard that companies can use as a quality label, a sure sign and guarantee for investors – large and small – that what is labelled green is actually green.


The focus is not only on institutional investors. Retail investors will in future be asked about their sustainability preferences by their financial service provider. And this preference will have to be strictly followed.


These measures should redirect money towards sustainable investment on a scale big enough to meet the need to rapidly transition to a truly sustainable economy.


If money goes to green industries, that means we can create more green, future-proof jobs. Sustainable investment means that we are helping the wider economy become greener as well. But we also need to take into account that there will be change to people’s lives and livelihoods. We need to make sure there is a just transition – so that people who previously worked in coalmines, for example, can find new work with training and support.


Our work is also about making sure the financial system can weather the impact of climate change. We will integrate sustainability in all parts of the EU financial landscape and all our legislation. For example, we will include climate and environmental risks in financial sector reporting standards and credit ratings. The impact of climate change, such as extreme weather, comes at a high cost. This cost must be factored into business models, so it can be mitigated by investing in counter-measures.


Environmental challenges are global, so the response has to be global too. Climate change does not stop at borders. Governments around the world are making significant efforts, setting targets for emission reductions and drawing up action plans to achieve those targets. Many countries announced increased climate pledges at the Leaders’ Summit on Climate hosted by President Biden a few months ago – and COP 26 in Glasgow later this year will be a critical moment.


Given the expertise we have on sustainable finance, Europe is happy to share its knowledge and lead the rollout of solutions across the world.


Countries should share the best ways for how to transition to sustainability and learn from each other. This is exactly what the EU is doing with the International Platform for Sustainable Finance, bringing together policy-makers representing more than half of the world’s population, GDP and greenhouse gas emissions. And we would welcome the participation of more countries which collectively represent the other half of the world’s population on the International Platform as soon as possible.


In time, we should try to bring sustainability rules in line as much as we can. Financial markets and those active on them are global. So having different or diverging rules makes it more complicated for them to integrate sustainability.


The EU’s targets are very ambitious and require a sustained effort to be achieved. But this work is absolutely essential for the planet – and for financial stability. We must manage the transition carefully, to ensure that it is swift, fair and stable.

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