How good is good enough?

The chair of the newly created EU Platform on Sustainable Finance, PRI’s chief responsible investment officer Nathan Fabian, explains how the platform will support financial markets to steward and allocate their capital to activities that contribute substantially to Europe’s sustainability goals.

In a first-of-its-kind, today the European Commission has launched its new Platform on Sustainable Finance. The platform responds to the urgency of the sustainability transition by establishing a permanent public and private sector expert panel to develop sustainable finance policies and tools. Its mandate includes further development of the technical screening criteria for the EU’s sustainable taxonomy, as well as a review of potential social and significant harm criteria. The platform has two further objectives – to monitor capital flows to sustainable finance and to undertake policy development on sustainable finance. For the first time, we will know how much of our capital is sustainable – and how much is not.

The platform’s 50+ experts include representatives from investment, banking, scientific, industry, environmental groups and civil society. Importantly, the group includes members with direct expertise from many of the economic sectors that must contribute to a sustainable economy. The private sector members are joined by representatives of the European Environment Agency, the European Supervisory Authorities (EBA, EIOPA, ESMA), the European Investment Bank, the European Investment Fund and the European Union Agency for Fundamental Rights.

Reflecting the global importance of Europe’s efforts, the platform will include observers from the Network of Central Banks and Supervisors for Greening the Financial System, the Organisation for Economic Co-operation and Development, the European Financial Reporting Advisory Group, the United Nations Environment Programme Finance Initiative, the European Bank for Reconstruction and Development and the European Stability Mechanism.

The initial two-year mandate of the group includes:

(i) development of technical screening criteria for the EU taxonomy,

(ii) review of the taxonomy to potentially include social and significant harm criteria;

(iii) observation of capital flows towards sustainable finance, and

(iv) policy development on sustainable finance.

Critical issues loom for the platform on how taxonomy criteria can inform transitional finance for economies, companies, and financial portfolios to align with – and contribute to – sustainability goals. Of equal importance is monitoring the development of reporting on taxonomy alignment, to ensure that investors with disclosure obligations under the Taxonomy Regulation and companies with obligations under the Non-Financial Reporting Directive can fulfil them in a meaningful way.

Unless we base our understanding of “how good is good enough” on the actual contribution to sustainability goals, rather than solely on good intentions or incremental plans, economic transition will stall and financial markets will struggle to play their full potential role in realising sustainability goals.

The platform’s launch is one way to deliver on European Green Deal. The green deal brings sustainability objectives to the core of Europe’s shared strategy for prosperity. The centrepiece is a goal to reduce greenhouse gas emissions by at least 55 per cent below 1990 levels, in 2030. This deep reduction target establishes a pathway to net zero emissions by 2050 that is consistent with ambitions to limit warming to around 1.5 degrees – the aim of the Paris Agreement.

To achieve the 2030 target in Europe, EUR 350 billion per year of energy-related investment alone will be required. This is before finance for Europe’s other environmental priorities is added, which will include investments in climate adaptation, pollution prevention and control, water system health, bio-diverse eco-systems, and a circular economy.

Financial markets work best when they are free to assess risk and pursue returns. But investment in economic activity which pollutes, wastes and is unresponsive to environmental constraints is shifting costs and building financial risk. Investors and lenders have known this for some time. Now that environmental and social goals are becoming explicit, urgent, and supported in law, financial activity that is careless about sustainability performance becomes one of society’s problems, not part of the solution to greater or shared prosperity.

Recognising the importance of climate goals, 45 institutional investors and over 1000 companies have made their own commitments to net zero emissions by 2050 and reported them as part of the UNFCCC race to zero campaign. Contributing to this is the PRI and UNEPFI convened Net Zero Asset Owner Alliance, which includes 29 investors managing nearly $5 trillion, who have made commitments to align their portfolios with a pathway to net zero by 2050. These investors will transition their portfolios to a sustainable footing and the Taxonomy will inform their decisions.

Without a comprehensive and widely used sustainable taxonomy, fragmentation and differences of view on the environmental performance of our economies threatens to undermine trust and efficiency in financial markets at a time when both matter greatly. Unless we base our understanding of “how good is good enough” on the actual contribution to sustainability goals, rather than solely on good intentions or incremental steps, financial markets will struggle to play their full potential role in realising sustainability goals.

The Platform on Sustainable Finance will support financial markets to steward and allocate their capital to activities that contribute substantially to Europe’s sustainability goals. The taxonomy is the foundation on which these decisions can be based, ensuring that for the first time, we will know how much of our capital is sustainable and how much is not.

The PRI has worked with its responsible investor signatories to ensure that market insights influence the design of Europe’s future financial system. The PRI has been a conduit and facilitator of both technical input and investor experiences into the deliberations of policy makers and on the design of the EU Taxonomy. The PRI is delighted to continue contributing to Europe’s sustainable finance activities by supporting the appointment of Nathan Fabian in the role of Chair of the Platform on Sustainable Finance.