Greening the EU’s financial system

04 July 2019

It will take time for new green standards to convert the massive existing base of financial obligations, but the process is now well underway, writes Graham Bishop.

The European peoples expressed their will in a number of ways in the May Parliament elections. Perhaps most significantly for the longer term, the Green political family leapt from 51 seats to 70 – turning it into a key power broker in a four-way split of the major party groupings. In each of the European Parliament elections this century, the Greens have been edging up steadily from the low-40s of seats. Now they are at the top table.

Though the Green wave did not wash into southern or eastern Europe, it swept the Greens into second place in Germany and third in France. In Germany, the 15-24 age group – the very future of politics – 34% voted Green versus 11% for the traditional CDU. In France, 22% of that age group voted Green. Some may argue that this was all a protest vote but the real consequences are well underway as the European institutions will have to rely on some accommodation with the newly-empowered Greens to get legislation enacted.

The June European Council recognised this new reality when laying down its “New Strategic Agenda 2019-2024”: Item 3 is “building a climate-neutral, green, fair and social Europe”. However, this is not a sudden, Damascene conversion – certainly as far as the financial system is concerned. In May 2018, the Commission adopted a package of measures implementing several key actions announced in its action plan[1] on sustainable finance. The package included:

A proposal for a regulation to facilitate sustainable investment. This would be the framework to gradually create a unified classification system ('taxonomy') on what can be considered an environmentally sustainable economic activity.  This is probably the necessary first step so that well-intentioned investors can be sure that they are genuinely funding sustainable activities.

A proposal for a regulation on disclosures relating to sustainable investments and sustainability risks. This regulation will introduce disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors in their risk processes. There will be further secondary legislation to spell out how to integrate ESG factors in investment decision-making processes.

A proposal to amend the benchmark regulationto create a new category of benchmarks for low-carbon and positive carbon impact benchmarks.

© Graham Bishop