EU unveils sustainable finance strategy to tackle climate change

    12 Jul 2021

    The European Commission presented a strategy for sustainable financing to combat climate change and the European standard for “green” bonds. Also, it adopted a delegated regulation regarding the disclosure of information by financial and non-financial companies about the degree of stability of their activities.

    “A sustainable finance strategy is key to leveraging private finance to meet our climate goals and other environmental challenges. We also want to create opportunities for sustainable financing for small and medium-sized businesses”, said EU Commission Executive Vice-President Valdis Dombrovskis in the official press release.

    The European Commission has unveiled new plans to galvanize the private sector to invest in sustainable projects and help governments finance the green transition.

    The new financial strategy, which includes a regulation to set up a “gold standard” for green bonds, comes mere days before the executive is scheduled to present a vast legislative package to enable the European Union to cut greenhouse gas emissions by at least 55% by the end of this decade.

    The Commission is well aware of the hefty price that this goal entails and, despite setting a minimum target of 37% for green investments in its €750-billion recovery fund, much more money is needed.

    “Over this decade, we estimate that Europe will need around €350 billion of extra annual investment to meet its 2030 emissions target in energy systems alone. This is in addition to around €130 billion it will need for other environmental goals. We have known for a long time that public money will not be enough. And we have to rely on the private sector. This is why sustainable finance is so important: to generate investment at the scale needed,” said Dombrovskis.

    As noted in the press release, the stability of the work of companies is a crucial feature of the EU recovery after the COVID-19 pandemic, and the financial sector will play a vital role in achieving the goals of the European Green Deal.

    The new sustainable finance strategy aims to support financing the transition to a sustainable economy by offering a set of measures in four areas: 

    • financing for the transition, 
    • increasing the inclusiveness of small and medium-sized enterprises and consumers, 
    • increasing the resilience and contribution of the financial system, 
    • developing international initiatives and standards for sustainable finance along with the support of the EU partner countries.

    In addition, the European Commission has proposed its version of the European standard for green bonds as part of the Green Deal strategy. It is noted that such regulation will help avoid green money laundering (greenwashing) and establish a gold standard for how companies and government bodies can use green bonds to raise funds in the capital markets.

    “Issuers will have a reliable tool to demonstrate that they are financing truly green projects that are in line with the EU taxonomy. And investors who buy bonds will be able to more easily evaluate, compare and trust that their investments are sustainable, thereby reducing the risks associated with “green laundering,” the message explains.

    The European Commission has also adopted a delegated regulation complementing Article 8 of the Taxonomy Regulation. It requires financial and non-financial companies to provide investors with information on the environmental performance of their assets and economic activities, including information on capital and operating costs associated with environmentally sustainable economic activities. As noted, markets and investors need transparent and comparable information on sustainable development to prevent green laundering.

    The delegated regulations will be submitted to the European Parliament and the EU Council.

    As reported, to accelerate the energy transition, the European Commission has developed the world’s first classification of environmentally sustainable activities – the “green” taxonomy of the EU. The first part was published on April 21 and will come into force in January next year.

    The EU Green Taxonomy is a scientifically based system that defines for investors the types of activities that will enable the decarbonization of the economy.

    The European Commission has adopted several measures to increase its level of ambition on sustainable finance. First, the new Sustainable Finance Strategy sets out several initiatives to tackle climate change, and other environmental challenges, while increasing investment – and the inclusiveness of small and medium-sized enterprises (SMEs) – in the EU’s transition towards a sustainable economy. The European Green Bond Standard proposal, also adopted by EC, will create a high-quality voluntary standard for bonds financing sustainable investment. Finally, the Commission adopted a Delegated Act on the information to be disclosed by financial and non-financial companies about how sustainable their activities are, based on Article 8 of the EU Taxonomy.

    These initiatives highlight the EU’s global leadership in setting international standards for sustainable finance. The Commission intends to work closely with all international partners, including through the International Platform on Sustainable Finance, to cooperate on building a robust global sustainable finance system.

    A new Sustainable Finance Strategy

    Over the last number of years, the EU has become significantly more ambitious in tackling climate change. The Commission has already taken unprecedented steps to build the foundations for sustainable finance. Sustainability is the central feature of the EU’s recovery from the COVID-19 pandemic, and the financial sector will be vital in helping to meet the targets of the European Green Deal.

    The strategy includes six sets of actions:

    ·        Extend the existing sustainable finance toolbox to facilitate access to transition finance

    ·        Improve the inclusiveness of small and medium-sized enterprises (SMEs) and consumers, by giving them the right tools and incentives to access transition finance.

    ·        Enhance the resilience of the economic and financial system to sustainability risks

    ·        Increase the contribution of the financial sector to sustainability

    ·        Ensure the integrity of the EU financial system and monitor its orderly transition to sustainability

    ·        Develop international sustainable finance initiatives and standards and support EU partner countries.

    The Commission will report on the Strategy’s implementation by the end of 2023 and actively support the Member States in their efforts on sustainable finance.

    ‘Gold standard’

    The main element of the new strategy is a draft regulation that would establish a voluntary European Green Bond Standard (EUGBS). According to the Commission, this proposal will create a “high-quality voluntary standard” available to all issuers, both public and private, inside and outside the EU, to help raise funds on capital markets directed towards sustainable investments.

    The “gold standard” will ensure that the projects financed by green bonds will be sustainable and avoid the so-called greenwashing, a common misleading practice that advertises products and services as eco-friendly when, in fact, they are not.

    Fears of greenwashing inside the European Union have increased in recent years as the bloc’s €1.07 trillion multi-annual budget, powered by the recovery fund, boosts the circulation of EU funds across the continent.

    The money raised by the green bonds under the EUGBS system will have to benefit investment projects that comply with the EU taxonomy, a technical rule book that identifies economic activities in line with the Paris Agreement.

    The taxonomy splits projects into two main categories: 

    • “sustainable,” like hydrogen, solar power, bioenergy;
    • those that cause “significant harm” to the environment, like coal and lignite. 

    The criteria cover sectors that are responsible for almost 80% of direct greenhouse gas emissions in Europe.

    Controversially, the Commission has delayed a decision to include in the taxonomy gas and nuclear energy due to profound disagreements between EU countries.

    EU green taxonomy – a guiding star for investors

    Let’s check the explanation by Marc-Antoine Eil-Mazzega, Director of the Center for Energy and Climate Issues at the French Institute of International Relations (IFRI), Paris.

    The European Commission has developed the world’s first classification for environmentally sustainable activities to accelerate the energy transition. The first part was published on April 21, 2021, and will come into force in January, 2022, in the context of implementing the Green Deal strategy. The EU Green Taxonomy is a scientifically based system that defines the activities for investors that will enable the decarbonization of the economy.

    The taxonomy is simple: it will require significant funding to implement new technologies and solutions. There is no doubt that the taxonomy will serve as an incentive for the financial sector to invest in low-carbon technologies rather than in “dirty” activities. Moreover, there is a need to improve transparency and accountability in the financial sector. The goal is for governments, companies, banks, investment, and pension funds, and insurance companies to organize and report on a taxonomic basis. This will make more money available at a lower cost for all activities to promote the green transition, while it will be more complex and more expensive for others to access funds.

    Investor, cause no harm!

    Taxonomy is of strategic importance: it will have a significant impact on business in the coming years.

    First, the taxonomy will be the basis for issuing green bonds. Secondly, the EU and its member states will implement any new subsidy or support scheme for a specific project or sector following the taxonomy criteria. Third, banks and other EU financial players will have to report on their activities and adjust their lending policies based on these criteria. This will provide an opportunity to better analyze and compare their portfolios to cut off any greenwashing options. More and more companies will have to develop taxonomy-based non-financial reporting on the environmental sustainability of their operations. The savings of millions of people can be invested with greater transparency and accountability.

    The legal framework for EU taxonomy came into force in July 2020. It established six environmental goals:

    · Climate change mitigation.

    · Adapting to climate change.

    · Sustainable use and protection of water and marine resources.

    · Transition to a circular economy.

    · Prevention and control of environmental pollution.

    · Protection and restoration of biodiversity and ecosystems.

    The taxonomy lists three types of environmentally sustainable activities: 

    • those that contribute significantly to environmental protection (e.g., mitigation of climate change); 
    • those that can help other sustainable activities (support activities);
    • those that bring real improvement but are not sufficient on their own to achieve carbon neutrality (transition activities). 

    All others not selected after applying these technical criteria are considered harmful.

    What to do with gas and nuclear power?

    However, the detailed categorization caused serious controversy since, in the draft version of the taxonomy, released on November 30, 2020, the European Commission excluded nuclear energy from the classification of environmentally sustainable activities because radioactive waste can potentially contaminate the soil and, thus, does not meet the maxim “do no harm”. In addition, natural gas was also excluded: to qualify for environmental sustainability; gas-fired power plants must emit less than 100 g CO2/kWh and operate less than 2000 hours per year. This means that their activities must be combined with technologies for capturing and storing carbon dioxide or hydrogen, or biomethane production. At the same time, gas power plants must operate at their peak level, which, by the way, is very expensive.

    Several Central European countries have opposed this because they believe gas can help them meet their climate targets for 2030. They also find it impossible to move immediately to alternative, often non-existent solutions. The same goes for nuclear energy: several member states, including France, also opposed this classification, accusing the European Commission of adopting an ideological approach under pressure from Austria, Germany, and Luxembourg, which contradicts all scientific justification.

    On the other hand, during the public discussion of the taxonomy project, there were fears that they say taxonomy runs the risk of killing the “green” transition if, for example, the gas is turned on. There were rumors that countries and industries would move away from taxonomy, believing that it runs the risk of creating a green bubble. In this atmosphere, the European Commission has decided not to include gas and nuclear power in the first part of the taxonomy, published in April. It has pledged to clarify its position in the coming months.

    Likely, nuclear power will eventually be recognized as environmentally sustainable against the backdrop of conclusions prepared by a particular technical group of the European Commission, which two other technical groups will study over the next three months.

    It is also expected that, despite the emission limit for gas-fired power plants or district heating systems at 100 g CO2/kWh, the taxonomy could include a provision for investments in the construction of gas-fired power plants to replace coal. Such power plants can be considered as transitional if they:

    ·        allow to reduce emissions by 50% (40% for district heating systems);

    ·        allow the use of cogeneration;

    ·        will be built by the end of 2025, and their emissions will be no more than 270 g CO2/kWh.

    They will have an important role to play in ensuring the sustainability of the electricity supply.

    Once the taxonomy is published, the European Parliament and the European Council must adopt it. The process is not yet complete.

    Its important provisions would contribute to stabilizing the nuclear fleet in Europe and help member countries develop nuclear energy. This, in turn, will be of particular interest to companies with nuclear power plants in their portfolio, from France, Poland, Hungary, Czech Republic, Romania, Bulgaria, and possibly also Estonia, the Netherlands, Sweden, and Belgium. As a result, this should facilitate the development of mechanisms for public funding and support for nuclear energy, bringing it on a par with wind and solar power. At the same time, the financial sector will have incentives to finance these value chains.

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