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Europe’s action plan for ‘Sustainable Finance’ threatens to derail

By Kees Vendrik, Chief Economist, Triodos Bank N.V

Last year, the European Commission launched an action plan for ‘Sustainable Finance’ to put the European financial sector on a sustainable track. The idea behind this European action plan is excellent: aligning the finance sector with the goals of creating a sustainable economy. The whole finance sector – banks, pension funds, insurers and asset managers – must act to limit climate change under the goals of the Paris Climate Agreement and to implement the Sustainable Development Goals. With effective financial rules they can be encouraged to properly weigh the social impact of all financing and investments and to communicate about this with their clients and the world at large.

But as always, the ‘devil is in the detail’. And the details of financial regulation changes are hardly something that most people have time or inclination to study in too much detail – even if the technical jargon was simplified. And because policy makers are aware that those details avoid the spotlight, all sorts of actions and interventions are unleashed that would be far less acceptable if they were out in the open.

And that principle applies to the most fundamental of regulations that is being discussed: disclosure. Under the original proposal, every investment product would be mandated to disclose its risks and impacts on the environment and society. It would give investors the understanding of the consequences of their investments on issues like climate change, human rights and other critical issues in the same way that investors need to understand financial risk and return.

But now we are the phase where the details get worked out and the ideas reach the threshold of passing into legislation, then those who publicly support the principles of transparency, suddenly realise that it might actually apply to them. Are they willing to really disclose the things they might not be so proud of in their portfolios? They argue: “wouldn’t it be better to only tell people about the ‘good stuff’ and make this just apply to green funds?”. Or “disclosing impacts at a fund level sounds difficult and costly, can’t we just tell people what our generic policies are?”. The answer, to be as frank as campaigners like Greta Thunberg, is simply – “no, not good enough.”

The financial industry for too long has had a tendency to treat citizens as children – excluding people from decisions which need to be left to the ‘grown ups’. Now, more than ever before, we need citizens to be made aware of the consequences of their financial decisions, so they can play a role in transitions society needs to make in the EU and beyond. At a time of fragile trust in institutions, blocking citizens from the rights to know the relationship between their investments and the environment & society would be hammer blow to those seeking to empower people and communities.

Beyond this, there are broader concerns about what member states are pushing back on. Investments in fossil energy are out of range of the action plan, and the spectre of ‘greenwashing’ is lurking. Everyone seems happy to promote green finance and talk about the new green shoots (especially when it is supported by governments and increasingly favourable underlying economics). But the ‘fossils in the cupboard’ are an altogether more sensitive issue and risk being glossed over, when in reality that is the real threat to sustainability that Europe is contributing to. Waiting too long to address the transition out of environmentally damaging financial exposures and curtail greenhouse gas emissions is the biggest risk to climate change. And there is a fundamental conflict between reducing direct financial risks (‘please let us run out our stock of polluting assets’) with reducing environmental risks (e.g. the actual harm our investments do to the planet). This important distinction needs to be made very clear to all. There are good examples emerging nationally, such as the Dutch climate agreement mandating the financial sector to measure and reduce the carbon footprint of financing and investments. The EU has the opportunity to build on that and demonstrate leadership that is commensurate to the task ahead if it is to prove itself to be more than words.

And when it comes to the choice of words, there is the issue of ‘taxonomy’: who gets to decide what we call green? The aim here is to find a definition of sustainable activities (or otherwise). Here too, pressure is being exerted to limit taxonomy to the definition of ‘sustainable’ and to leave fossil financing out of the picture. And pressure to deem nuclear power as sustainable. Or portfolios with up to 50% oil & gas finance. The end result of this could be even more confusion – the opposite of what a taxonomy is meant for. And the real-world consequence may be that while not a single euro will be transferred from the fossil to a truly sustainable economy, there will be a forest of reports and advertising financial institutions bragging about ‘sustainable’ finance achievements.

After huge efforts on the part of High-Level Expert Groups, technical expert groups, MEPs and members of the commission, the current debate with member states has veered off course. The essential question of how the financial sector can contribute to the necessary sustainable, inclusive transition is hardly being discussed.

The direction of the debate in the last few weeks show the citizens of Europe are up against. We’ve demonstrated that we want more action on sustainability. We’ve changed the rhetoric of CEOs, politicians and financial institutions. But we haven’t yet converted this into action in rewriting the rules of the game where it can really make a difference.

The pushback on the European Parliament proposals by member states in recent weeks do not serve Europe’s ambition to show leadership in the sustainable transition of economy and society. The financial sector runs the risk of undermining precarious public confidence by putting ‘official’ green stickers on existing funding and investments. In the fight against uncontrolled climate change, this could lose us precious years that we do not have to spare.

And in a climate of distrust in institutions, it further prolongs the information asymmetry that keeps us stuck in the position we are in. We know there are politicians and CEOs out there who are truly committed to tackling climate change. Now is their time to speak out and make their voices heard where it really counts. And that’s equally if not more true for every citizen.

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