The European Union has committed to a sustainable future with more conviction than any other region in the world. This commitment is underpinned by the instrument most effectively utilized in Europe: regulation. It is a legal and normative framework designed to enable companies and financial institutions to complement the investment efforts that the public sector must undertake to achieve the environmental objectives established in the Paris Agreement and the United Nations Sustainable Development Goals.
It is significant that the European Commission, despite the slowness with which it tends to address a large proportion of community challenges, has advanced swiftly since 2018 and has been able to provide a solid foundation upon which to build the pillars of sustainable finance. Recently, three legislative proposals have been adopted that aim to give an even more intense boost to the transformation of the productive model: the Taxonomy Regulation, the Non-Financial Reporting Directive, and the regulation of climate benchmarks.
Following this initial impetus, three events converged in 2020 that once again give a transcendental turn to the development of sustainable finance. The first is the European Green Deal, with which the European Commission seeks to respond decisively to the desire to achieve climate neutrality by 2050, an objective that is asserted by considering the ambition to reduce greenhouse gases by up to 55% by 2030. The second is the creation of the Platform on Sustainable Finance, which aims to advance the development of taxonomy in all its dimensions. The last ingredient, a result of COVID-19, highlights the importance of sustainability in economic recovery plans and in the NextGenEU funds program.
Under this new direction, the European Commission has declared its readiness to tackle, both in 2021 and in the coming years, a much more ambitious sustainability agenda that will seek to cement the foundations of the sustainable finance ecosystem through six lines of action. Firstly, the legal framework must be refined to ensure that the financial sector can support both companies transitioning towards a sustainable economy and those demonstrating a firm intention to join this transformation process. Furthermore, the financial support proposed by the European Commission through the NextGenEU plan must be a lever that helps promote private capital in the right direction. The third line of action consists of ensuring that climate is only a starting point and that the EU’s ambition must extend to environmental, social, and governance objectives. The fourth issue involves articulating transition pathways compatible with climate neutrality by 2050, which companies and the financial sector must embrace. The fifth topic is about resilience, not only from a prudential perspective but also in ensuring that the EU’s economic system is more robust against future crises. Finally, the European Commission commits to looking beyond Europe with formulas that align with the EU’s climate change objectives.
A solid approach that is surprising both for its consistency and the speed at which it is progressing. However, it would be absolutely naive for Europe to be content with leading the fight against climate change solely by enacting a broad legislative and regulatory framework, as regulation is only one ingredient among many that must be managed to achieve the productive and social transformation implicit in the Paris Agreement. Likewise, it would be short-sighted to consider that this effort can be undertaken in isolation, as it would be as inefficient for the objective pursued as it would be unproductive for European companies, which would end up suffering strong competitive pressures.
The EU cannot let its supposed leadership in sustainability issues pass without championing a new stage of globalization that is more balanced, more social, and more inclusive—that is, a Globalization 2.0 that lays the groundwork for greater global coordination on many more issues than just climate. Conversely, adhering to the regulatory straitjacket imposed by Europe will only foster spurious, inconsequential leadership that would soon have to yield to other countries more committed to impact and action than to the regulatory framework.
Fortunately, many European companies and financial entities are proactively advancing, in many cases anticipating both the complex regulatory framework and the preferences of investors and consumers. Risk management and capitalizing on opportunities derived from climate change and biodiversity recovery, two sides of the same coin, are more than sufficient factors to mobilize the capital required for the transition from the current economic model to a more sustainable one that respects environmental, social, and governance needs. Banks are not going to wait for the regulatory framework to be perfectly established or for the year 2030 to adjust. This is the only way to understand why banks, as financiers of the economy, are at the forefront of driving this necessary transformation with ambitious public commitments, such as Net Zero 2050, or by being part of a global coalition of public and private institutions capable of mobilizing the private financing required for the re-engineering of our economies towards a decarbonized world, as will be promoted at the upcoming Climate Summit, COP26, in Glasgow.
Juan Carlos Delrieu, Director of Strategy and Sustainability at the Spanish Banking Association
