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On the 8th of March 2018, the European Commission unveiled its Action Plan on Sustainable Finance , structured around 3 major objectives: reorient financial flows towards sustainable activities mainstreaming sustainability in risk management, and promoting transparency on these subjects. To accelerate and deepen this work, the new European Commission will adopt a renewed Sustainable Finance Strategy.  As the public consultation to define the future directions of this strategy draws to a close, Julie Evain from I4CE points out three challenges to be met in order to integrate climate issues into the financial sector.

The first Action Plan for 2018 recognized that climate and environmental issues are no longer the concern of a niche market but rather an issue for all financial players, politicy -makers and regulators. We should welcome this rapid awareness. Nevertheless, as the climate issue progresses among these players, the immensity of the workload to be carried out is gradually being revealed.

 

Financial actors do not concretely understand the nature and extent of climate change and low-carbon transition

 

The first challenge is the understanding of climate issues by financial players. This is undoubtedly the most important task: it will be difficult to hope for real change until these players have a concrete understanding of the nature and extent of climate change, the transition to be made and the financial risks inherent to this transformation process.

The climate must no longer be the sole responsibility of the sustainable development teams, but must be integrated at all levels of the financial sector: from the board, to the risk division, to the retail and corporate client advisers.

This lack of understanding leads to a lack of capacity in the financial sector. As long as climate topics are not a fundamental part of financial education, at university and in further education, people are unlikely to feel both responsible and well equipped to tackle the problem.

 

The second area is data, scenarios, evaluation methodologies.

 

The second area is data, scenarios and evaluation methodologies. This is certainly a technical task, but it is nevertheless essential to integrate climate into the analysis and management of financial risks. Financial players thus need more precise data on the physical, economic and financial impacts of climate change. But for the integration of these data into their process to have a real impact, they need above all to know which data are relevant. For example, how can the sustainability of a real estate construction project in Florida be assessed?  Do they need data on building materials, building elevation, water rise projections, developer commitments, the city’s adaptation strategy, the sustainability of buyers’ professions?

Meeting the data challenge is difficult: future data is not available, or are only available in the form of assumptions, while historical data is increasingly irrelevant to understanding the evolution of the climate system. Financial actors also need scenarios, both climatic and socio-economic, from the global to the more local scale, to use as a basis for developing strategies and evaluating projects and enterprises.

Finally, financial actors need assessment methodologies to understand the links between their loan or equity portfolios and climate change. These tools are expected to assess exposure to transition and physical risks. They should also make it possible to assess the compatibility between portfolios and a development pathway that keeps us below two degrees.

However, there is a lack of relevant and useful tools to assist in financial decision-making and to manage deep uncertainties. The tools we do have are still in their infancy and they often do not properly assess the real impact of financial decision-making on behaviours in the real economy.

 

Reconnecting finance to citizens through sustainable savings.

 

The third area of work would be to involve citizens in this evolution of finance through sustainable savings. If finance has gradually moved away from the real economy, it has also moved away from citizens, to whom it may seem disconnected and out of touch. Most citizens feel very distant from the financial spheres and do not understand what is being done with their savings, nor what role they can play as savers.

According to a similar logic, many citizens, although willing to make changes in their daily actions, may feel disconnected from the fight against climate change and the achievement of sustainable development goals. The EU has an opportunity to re-engage with citizens on these two issues through sustainable savings programmes, as has been done in the Netherlands for the past 25 years, for example. Dutch citizens can thus choose to invest their savings in labelled green funds, with transparency on what is being financed, and they benefit from a tax incentive that encourages them to take an interest in this type of investment.

Sustainable savings could help to promote both citizen involvement and education on sustainable financing and climate change financing issues. More generally, it would be an opportunity to engage the general public in a more technical debate on what is involved in financing the transition: what activities can be financed, what project monitoring mechanism can be put in place, what impact and what share of risk can be expected from citizens?

Conclusion

The work to be carried out is huge. Sustainable finance was one of the strong markers of the previous European Commission, which, thanks to its Action Plan, gave an initial impetus. However, much remains to be done to ensure that these developments go beyond the financial sphere and have an impact on the real economy, businesses and citizens. The low-carbon transition and the challenges of sustainability are an opportunity for the financial sector to refocus on its primary utility: financing the real economy and supporting its major changes.

See our response to the Consultation :

 






Contact


Julie EVAIN

Project Manager - Finance

Julie works as a research fellow in the Finance, Investment and Climate Division on climate risks analysis topics for financial players. She also follows more broadly the issues related with green and sustainable finance and financial regulation.

Graduate of a Master’s degree in International Affairs and Environmental Policy at Sciences Po, she previously worked at the French National Assembly, at a consulting firm and at the French Ministry of the Environment, where she was co-rapporteur of the report ‘French strategy of green finance.

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