Private finance: it’s time to rethink the European strategy
There is a broad consensus that private finance has an important role to play in financing the climate transition, given the scale of needs and the constraints on public finances. Beyond investments in climate alone, all financial activities must be reoriented to be compatible with the transition. This shift cannot take place on a voluntary basis at the scale and speed required. The inactivity of financial players, the weight of past financing, and the demands of shareholder profitability limit the effectiveness of voluntary international initiatives to which private financial players commit themselves.
Action by public authorities is essential to redirect the activities of private financial players, and as the Commission’s term of office comes to an end and the European elections approach, it is time to question the EU’s current strategy in this area. It is unfortunate that this strategy is characterised by a “silo” approach to economic and financial policy. On the one hand, the Commission has developed Green Deal policies to accelerate the transition of players in the real economy and, on the other, its 2021 “Strategy for financing the transition to a sustainable economy”.
The report we published this week calls for a better integrated approach to these different policies. For example, increased capital requirements for high-emission activities can complement the effect of the price signal, which is currently insufficient. And mandatory transition plans or sectoral exposure limits are other channels than prices for influencing the decisions of financial players. The current silo approach is penalising the effectiveness of climate policy and prudential policy related to systemic risk. It is therefore high time for European public decision-makers to rethink their climate strategy with regard to financial players.