14 July 2020

UNEP FI urges the EU to embed sustainability impact into its Renewed Sustainable Finance Strategy

UNEP FI welcomes the Commission’s consultation and urges the EU to embed sustainability impact into its Renewed Sustainable Finance Strategy. Elodie Feller, UNEP FI Investment Lead, explains why.

In July 2020, the European Commission closed its stakeholder consultation on its Renewed Sustainable Finance Strategy, which will be adopted by year-end. The Commission’s proposal recognizes that the scale of investment necessary for a timely, just and sustainable transition goes beyond the capacity of the public sector and needs to include the private sector as well. The consultation sets an ambitious tone and touches on cross-cutting policy areas relevant to the investment, banking and insurance industries.

UNEP FI welcomes the Commission’s consultation and urges the EU to embed sustainability impact into its Renewed Sustainable Finance Strategy. Elodie Feller, UNEP FI Investment Lead, explains why.

As attention turns to planning for the post-COVID recovery and to preventing future outbreaks, we see a unique opportunity for the European Commission to demonstrate its leadership and commitment to the European Green Deal, by encouraging impact analysis and management by financial institutions, by setting the right sustainability targets, and by establishing a coherent and clear regulatory direction for the finance industry to support sustainable recovery efforts.

The European Commission’s ambitions for a sustainable economy have already led to several constructive developments, such as the EU Taxonomy and the EU Investor Disclosure Regulation. The EU Taxonomy specifies what level of environmental performance an economic activity should have if it is going to contribute to Europe’s environmental objectives. The EU Investor Disclosure Regulation requires financial institutions and financial advisors to publish a statement on how they consider the principal adverse impacts of their investment decisions on people and planet.

These updates demonstrate significant regulatory effort to mandate performance against sustainability targets. This consultation suggests that regulatory frameworks in the EU can continue to improve, notably to fully embed sustainability impact into finance decisions, disclosure rules and (soft or hard) regulatory instruments to support the transition towards more sustainable business models.

UNEP FI strongly supports the European Commission’s proposals, both in terms of the direction being taken and in terms of the specific proposals that are being made for the Renewed Sustainable Finance Strategy. In particular with regards to:

• Raising the bar and emphasis on sustainability impacts. Within the next decade, assessing and managing the sustainability impact of finance through decision making processes need to be a core part of how finance institutions provide capital to the real economy.

• The broadening of the Commission’s focus from climate change to a more holistic approach to sustainability, encompassing the full range of positive and negative social, economic and environmental impacts. Finance should align its practices, strategies and capital allocation with the net-zero carbon objective (see the work of the UN-convened Net Zero Asset Owner Alliance), net gain of biodiversity (see our latest report Beyond Business as Usual: Biodiversity Targets and Finance), and inclusively the realization of the Sustainable Development Goals.

• The explicit focus on the banking sector, given the sector’s critical role in supporting the transition to the low carbon economy and the transition towards more sustainable business models. UNEP FI is supportive of a coherent regulatory framework that incentivizes and mandates the integration of impact in financial decision-making and also that influences the shaping of business models and strategies that have the ability to navigate and achieve the transition. Banks will need the whole economy to walk the talk to be in turn able to deliver all the expected benefits in terms of shifting capital to the transition.

The UNEP FI consultation response shares expertise and knowledge gained from initiatives led by its member institutions, with the objective to provide the Commission with hard evidence and hopefully confidence that the finance industry’s leadership must be reflected in their upcoming Renewed Sustainable Finance Strategy.

In responding to this consultation, UNEP FI also urges the European Commission to use this opportunity to embed investing for sustainability impact into investment frameworks. Investors that integrate environmental, social, and governance (ESG) factors in their investment processes also understand the need to shift their attention to sustainability impacts. Of course, all investments have positive and negative impacts – via the companies they invest in, but now these impacts need to be assessed, measured, managed and reported. The project A Legal Framework for Impact, undertaken collaboratively with the Principles for Responsible Investment (PRI) and The Generation Foundation as well as legal expertise from Freshfields, will produce legal and policy recommendations assessing the extent to which legal frameworks currently enable, impede, or need improvement for investors to drive this shift.

The Principles for Responsible Banking are now supported by more than 180 banks collectively holding USD 47 trillion in assets, or one third of the global banking sector. The signatories to these Principles echo the vision above in that they are required to perform an impact self-assessment of their activities. This year, the UNEP FI Positive Impact Initiative launched a Portfolio Impact Analysis Tool as well as a Corporate Impact Analysis Tool to help banks scrutinize their clients and investee companies’ impacts based on a common methodology. Also, through the UNEP FI and EBF Working Group, 25 major banks are already piloting the EU Taxonomy. A major report in Q4 2020 will present case studies and identify gaps and opportunities for the current EU Taxonomy to apply to banking products.

Despite significant advances, markets and the economy continue to operate beyond sustainability boundaries. For banks and investors to significantly help solve the big societal issues we face requires moving beyond integration of financially material ESG issues alone. We may not have time for those issues to materialize financially anyway.

The next frontier for sustainable finance to tackle is sustainability impact and integrating the consideration of sustainability impact into decision-making processes. Policymakers and regulators, through the frameworks they influence, must also align with this goal.

The UNEP FI consultation response prioritizes 14 questions across 5 themes:

1. The importance of taking a holistic impact approach, which focuses on the interlinkages between environmental, social and economic factors and the finance value chain (our responses to Questions 6, 8, 52, 82, 83, 89 and 90 focus on this theme).
2. Climate change (Question 10 in particular).
3. Biodiversity and ecosystems (Question 11).
4. The importance of harmonized and consistent disclosures across the value chain (Question 14).
5. The importance of mainstreaming both risk and impact management, in Europe and globally (Questions 60, 77, 91 and 102).

The full response to the consultation is available here.

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