A Sting Exclusive: “EU’s Sustainable Finance Action Plan – Laying down the foundations for a Greener Financial System”, by European Commission’s Vice-President Dombrovskis

Mr Dombrovskis’ exclusive piece is another precious response to the United Nations Under-Secretary-General Erik Solheim’s cutting-edge article on renewable energy investment and Sustainable Finance, exclusively written for The Sting. European Commissioner Vella had initially replied to the Head of UN Environment with his own insightful article on Sustainable Finance.

These world-shaping articles constitute the most consequential High Level dialogue in European media today, on Sustainable Finance. The opinions expressed hereby in this Sting Exclusive belong to VP Dombrovskis.

Since the signature of the Paris Agreement and the adoption of the UN 2030 Agenda for Sustainable Development, we have witnessed a shift in global attitudes towards climate change and environmental degradation. We only have one planet, and we must take care of it.

This is why Europe has set the bar high with minimum targets for 2030, such as reducing greenhouse gas emissions by 40%. In addition, the European Parliament and Member States recently reached a deal on a binding target of 32% for renewable energy by 2030, and a target of 32.5% for energy efficiency. And these targets could be further increased.

The EU is proud to lead the global fight against climate change, by transitioning towards a low-carbon and circular economy. This would also help our economy compete worldwide in the long-term. But to meet our ambitions, and the climate commitments set out in the Paris agreement, we will need large scale investment. No public authority can meet this challenge on their own, so private capital will play an increasingly important role.

This is why we proposed in March our 10-point Action Plan for Sustainable Finance. It is a comprehensive strategy with three overarching goals: to mainstream sustainable finance across the investment chain, improve transparency around sustainability risks, and reorient financial flows towards greener activities.

Given the urgency of tackling climate change, we are sticking to an ambitious timetable for putting this strategy into reality. So in May, we put forward the first four actions:

An EU classification system for sustainable economic activities

First, we proposed to establish an EU-wide taxonomy – or classification-system – for sustainable activities, to provide common definitions for what is green and what is not. We will assess sector by sector which economic activities within a sector are good for the climate and the environment. For example, within the building sector, a potential housing project could qualify as green based on its energy efficiency performance, or the share of recycled building material.

We have set up an expert group to develop the taxonomy, based on scientific evidence. Once the political negotiations in the European Parliament and the Council are complete, the Commission would turn the work of the expert group into a binding law. The EUs first climate taxonomy should be ready by the second half of next year, and enter into force six months later.

After that, we will extend the classification to other environmental objectives, relating to the circular economy, pollution, water and marine resources, and ecosystems. We could also expand it to social objectives.

This taxonomy would have several uses:

• it would act as a guidebook for national labelling schemes for green financial products;
• it would serve as a reference point for financial market participants to develop green financial products;
• and it would form the basis for future EU standards and labels for green financial products, such as bonds or investment funds. This would guide retail investors towards credible green financial products, and lay the foundations for a Single Market for sustainable investment.

Taking sustainability into account when investing for others

Our second proposal concerns asset managers and institutional investors – in other words anyone that manages investments on behalf of others. By considering sustainability, these investors can more fully assess long-term risks and opportunities for their clients. But today many of them do not systematically integrate such considerations into their decision-making process.  So we are proposing to clarify that this is indeed part of their duty towards their clients.

In addition, we want to increase transparency about how managers comply with this duty, so end-investors get the information they need regarding sustainability. So we have proposed that institutional investors should disclose how they take into account sustainability risks, and what impact these risks may have on returns.

Low-carbon benchmarks

Our third proposal relates to benchmarks, which indirectly play an important role in the investment landscape. For example, they can be used to create new investment products, to determine asset allocation strategies, or to measure performance. With our proposal, we want to make benchmarks a reliable tool for investors who want to invest in low carbon strategies, by establishing a new category of benchmarks, with two distinct types:

The first type would be the low-carbon benchmark, which is based on decarbonising a standard benchmark, for example an equity index. The second type is a positive carbon impact benchmark, which should be aligned with the 2 degree objective of the Paris agreement.

We will establish minimum standards for the methodology of these benchmarks. In addition, providers of low-carbon benchmarks will have to disclose how their methodology takes into account environmental, social and governance factors.

Assessing and catering to the sustainability preferences of clients

Finally, our fourth measure relates to the investment advice that investment companies and insurance distributors give to their clients. We will propose to update the suitability test, so retail investors are asked about their sustainability preferences. Clients would then need to be offered investment products in line with these preferences. The aim is simple: to make it easier to invest in green assets, for those who want to.

An ambitious timetable for action

Sustainable finance is growing fast, and is no longer a niche. With these four measures, we want to keep up the momentum, put sustainability on top of the agenda, and work to mainstream sustainable finance globally.

We will follow an ambitious timetable to put our Action Plan into practice, because the urgency of climate change dictates it.

About the author

Valdis Dombrovskis is the Vice-President of the European Commission responsible for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and the Capital Markets Union.

Prior to that, he served three consecutive terms as Prime Minister of Latvia, becoming the longest serving elected head of government in Latvia’s history.

Before becoming European Commission Vice-President, Valdis Dombrovskis was elected for the second time as a Member of the European Parliament (first, 2004-2009) and Head of the Latvian Delegation in the EPP Group.

He served as a Member of the Saeima (Parliament) of Latvia (March 2004 – June 2004; January 2014 – June 2014) and was Latvia’s Minister of Finance from 2002 to 2004.

Valdis Dombrovskis was born on 5 August 1971 in Riga, Latvia. He graduated with a degree in physics from the University of Latvia (1993) and economics from Riga University of Technology (1995). He received his master’s degree in physics in 1995 from the University of Latvia. In 1995 -1998, he worked as a research assistant at Mainz University, Germany, at the Institute of Solid-State Physics in Latvia and at the University of Maryland (USA). 

Prior to joining politics, he worked as a senior economist and Chief Economist at the Bank of Latvia (1998-2002). Together with Anders Aslund, he co-authored the book “How Latvia came through the financial crisis”, which was published in 2011.

In November 2014, Valdis Dombrovskis was awarded the Order of the Three Stars (Triju Zvaigžņu ordenis), the highest State Decoration of the Republic of Latvia.