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August 11, 2021

What’s needed for an effective EU Sustainable Finance Strategy?

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Author

David Cooke, Policy Manager

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Last month, the EU released its long awaited (and much delayed) new Sustainable Finance Strategy.

The strategy builds on the framework set out in the EU’s 2018 Action Plan on Financing Sustainable Growth – namely, a taxonomy of sustainable economic activities, a disclosure framework for sustainability information, and investment tools such as benchmarks, standards and labels. By further integrating sustainability into financial policy, the strategy will play a key role in meeting ambitious commitments in the European Green Deal, such as becoming the first climate-neutral region by 2050 and reducing greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.

At a moment when the EU is setting the bar for sustainable finance policies that could ripple far beyond Europe, and the IPCC has issued a stark warning that only rapid and drastic reductions in greenhouse gases in this decade can prevent climate breakdown, it’s an understatement to say that policy making under this strategy needs to be optimal. In light of this, today 2DII released a new paper that analyses the impact assessment for the legislative policy files under the Action Plan.

Concerningly, despite one of the objectives of the Action Plan being to reorient capital flows towards sustainable investment, 2DII’s paper reveals that there is hardly any assessment of the policies against this objective.

This is an alarming find. This means that currently, there is little evidence of the extent to which the existing components of the sustainable financial framework will contribute to the objective of reorienting capital flows. While the underlying rationale may seem intuitively reasonable, this is not enough, and certainly does not amount to evidence-based policy making.

Indeed, several problems from the Action Plan are already starting to materialise. For one thing, over the past six months, the sustainable finance dialogue in Europe has been dominated by the political wrangling which has accompanied efforts to finalise the climate taxonomy delegated act. And less visible but equally significant is the confusion in financial markets around classification of “sustainable” financial products (known as Article 8 or Article 9 products under the Sustainable Finance Disclosure Regulation). In fact, this prompted a letter from the European Supervisory Authorities to the Commission requesting clarification in this area – and only last week the Commission’s rather limited response was published.

While it might sound dry, the impact assessment is the key, if not the only way, to ensure a policy is best designed to meet its objective and is established as a key step in EU policymaking through the Better Regulation Guidelines. Where the objective is to reorient capital flows towards sustainable activities, then it follows that the impact assessment should assess the extent to which the recommended policy option contributes to this objective. Put simply, at the beginning of a critical decade for climate action, sustainable finance policy needs to do exactly what is says on the tin.

2DII’s paper puts forward several recommendations for how to improve this issue. In addition to improving the methodological process for impact assessments, 2DII recommends that:

  • The EU’s Regulatory Scrutiny Board should provide greater oversight of the impact assessment and the link to EU overarching climate policies; and
  • Constituencies involved in sustainable finance policy making (e.g. Directorate Generals, Regulatory Scrutiny Board, European Supervisory Authorities etc.) must build up their technical expertise on assessing reorientation of capital flows.

For more details on 2DII’s analysis and recommendations, read the full paper here.

Author

David Cooke, Policy Manager

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