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How Sustainable Finance can tackle Climate Change

Elena Philipova
Elena Philipova
Global Head ESG Proposition, Refinitiv

In December, we marked the third anniversary of the Paris Agreement and global leaders gathered in Katowice, Poland to discuss how they were going to tackle Climate Change and keep to their promise of lowering global warming to below 2 degrees Celsius. To reach these goals, the European Investment Bank predicts an additional €270bn will be needed for the energy, transport, water and waste sector. How will the financial sector become part of the solution? Additionally, how can the public and private sector come together to solve this?

The EU has committed to three climate and energy targets in 2030 in line with the Paris Agreement.


  1. Minimum 40% cut in greenhouse gas emissions compared to 1990 levels.
  2. At least a 32% share of renewables in final energy consumption.
  3. At least 32.5% energy savings compared with the business-as-usual scenario.

As part of the Technical Expert Group (TEG) for Sustainable Finance, I joined a panel of experts to discuss our role in helping the European Commission introducing new policy to achieve these targets. Martin Spolc, Head of Unit for Sustainable Finance at the European Commission moderated the session, and was joined by Nathan Fabian, Director of Policy and Research at PRI; Aila Aho, Head of Sustainable Financing at Nordea Bank AB; and Jose Luis Blasco, Member of IEAF/EFFAS.

Divide and conquer

There are four key areas the TEG is working on to support the Commission’s action plan on sustainable finance:

  • EU classification system – the so-called taxonomy – to determine whether an economic activity is environmentally sustainable.
  • EU Green Bond Standard (GBS).
  • Guidance to improve corporate disclosure of climate-related information.
  • Benchmarks for low-carbon investment strategies and enhanced disclosure for ESG benchmarks.
Source: European Commission

Taxonomy

A taxonomy is a classification system and we are hoping to use an agreed system to track economic activities, which aim to reach environmental targets. Nathan outlined how we are simply “not investing enough in a sustainable economy…if we want a productive company, we need a healthy environment, and we must have economic activities to support those outcomes.” This defined list of environmental resources and activities are affecting our communities & economies, which in turn affects the ability for investors to earn a financial return.

 

EU Green Bond Standard

The European green bond market was worth US$66Bn in 2018, but has huge potential for growth. Aila outlined the group’s aim to “introduce a standard to enhance transparency, consistency and comparability” to make sure participants can make more informed decisions and can support the market’s integrity. This work involves developing a system of tracking the use of proceeds and allocation of funds, pre and post reporting, and verification of reports in order to achieve this consistency. The ambition for the group? “This should be the gold standard in Europe that everyone would want to use, and serve as a beacon for international issuers” says Aila.

Corporate disclosure of climate-related information

Jose states we must have company disclosure to aid the conversation between the companies and society, the financial institutions, and the regulator. We need to look at “how the climate is impacting business and how the business is impacting climate change. If you don’t measure, you don’t manage.” Investors need sustainability information from companies to assess risks and move funds into the right economic activities to achieve a positive sustainability outcome. How the companies should report how they are achieving their goals is fundamental to this.

Low Carbon Benchmarks and ESG Benchmarks Disclosure

Benchmarks are used extensively by investors to measure and monitor performance, and construct financial products. Because of their extensive use, benchmarks must be part of the solution to climate change and help tackle the capital gap to fund projects we need to achieve the ecological and social objectives. By improving ESG benchmark transparency and the requirements for the construction of low carbon benchmarks, we can ensure there is consistency and better comparability in the industry.

The question arises whether these types of benchmarks and indicators might hamper innovation. This is false – there is a lot of innovation happening across the industry and our objective is to stimulate it even more. The objective is to establish minimum requirements and disclosure standards for the methodology and creation of those benchmarks with a primary goal of helping customers feel confident in those instruments and solutions when making investment decisions.

Low carbon benchmarks should not be tools for greenwashing either. We want them to have a real impact. The Technical Expert Group and I are working transparently with key stakeholders in the EU to test and validate every feature on the list against real conventional benchmarks to make sure we are not being too prescriptive. Asset owners and managers are already using hundreds of these products so client demand is definitely there, and solving the existing challenges aims at turning the potential capital into actual investments.

The Next Steps

As this important initiative led by the European Commission develops, we witness more corporates changing their business models to respond to the systematic risks that cut across the whole industry and align behind the common vision for long-term, sustainable prosperity. Most importantly, this business shift is proving financially successful and profitable – companies and investors are becoming ESG conscious and sustainable not only because it is the right thing to do, because it is good business.

Balancing short-term performance pressures with the need to invest in a low carbon, sustainable future is one of the most important challenges the business world faces today. Refinitiv helps our customers become sustainable leaders – making good investment decisions, driving growth, and mitigating global environmental, social and governance (ESG) risks.

We have been servicing the financial industry since the early 2000s with our market-leading ESG data, analytics and solutions. We’re at the heart of an ecosystem of change-makers championing transparency, standards and governance – empowering the business community to drive sustainable, social impact.

With the right data and frameworks, investors will be empowered in their investment decisions and money can continue to fund the right projects. This way, together we can achieve the environmental outcomes necessary to hit those EU Carbon and Environment targets and reach a zero carbon economy by 2050.

You can watch the replay of the roundtable on the @EU_Finance Twitter account and follow @Refinitiv to hear more about how we are driving sustainability changes in our own organization and the wider industry.

Find out more about Refinitiv’s ESG data today.