We need to turn environmental challenges into economic opportunities 

EU Commissioner Vella’s exclusive opinion editorial is published in response to the United Nations Under-Secretary-General Erik Solheim’s article on renewable energy investment and sustainable finance, first published at The Sting on 13 April 2018. The opinions expressed in this Sting Exclusive belong to the EU Commissioner.

Environmental risks to the economy cannot be ignored. The 2018 annual Global Risks Report of the World Economic Forum shows that 5 of the top 10 most likely risks are either environmental, or directly linked to environmental degradation.

Extreme weather events, climate change, man-made environmental disasters, water and food crises, and biodiversity loss all pose threats.

What we need to do is convert these warnings, this risk, into opportunity. It’s about environmental challenges creating economic opportunities.

I am convinced that we can and we should ‘scale-up’ business opportunities by channelling finance and investment towards activities that deliver environmental benefits and not environmental degradation.

This is what we mean by sustainable finance and sustainable investment.

The European Commission has long recognised that a healthy environment goes hand in hand with economic growth and jobs, and is an indispensable foundation for sustainable development.

Whether it is about water-related risks such as flooding and droughts, or stranded assets from biodiversity loss (e.g. in agriculture), it is clear that not addressing environmental risks threatens the stability of financial markets.

The environment is not a barrier to economic development. On the contrary, there is no successful, durable and competitive economic model if it is not sustainable.

Failing to address natural capital degradation poses risks not only to our health and the environment, but also to long-term economic growth, as well as to political and financial stability.

The transition to a low-carbon, resource-efficient and circular economy offers significant investment opportunities.

Action Plan on Sustainable Finance

Finance will be a major enabler of the transition towards a green economy. At the same time, the EU financial system itself will become more robust and stable as it integrates environmental, social and governance (ESG) considerations.

The European Commission has recognised the need for a large-scale effort to transform our financial framework, redirecting capital towards sustainable activities.

The Commission adopted an EU Action Plan on “Financing Sustainable Growth” on 8 March.

One of the first steps in implementing the Action Plan will be to develop an EU taxonomy – or a classification system – for sustainable finance, providing clarity on what is green and what is not.

We will also develop standards and labels for green financial products, notably by exploring the use of the EU Ecolabel framework to create a voluntary EU-wide labelling scheme for certain financial products. This will enable retail investors to put their money in sustainable projects.

Environmental Accounting standards will need to be developed too, so that information on the environmental performance of companies and projects – and its impact on financial performance – can be integrated into decision-making by investors.

To incentivise the financing of sustainable activities, the Commission is looking positively at the European Parliament’s proposal to amend capital charges for banks by introducing a so-called green supporting factor.

A ‘green supporting factor’ would mean banks need to hold less capital when making green investments because those investments would be considered as a lower risk-weighted asset (RWA).

However, implementation of such a system requires evidence that green investments indeed carry lower degree of risk, and probably substantial changes in banks’ risk management and supervision.

Finally, the Commission will propose amendments to existing legislation to clarify investor duties. This is to ensure that asset managers, pension funds and insurance companies consider environmental, social and governance (ESG) factors and risks in their investment decision process, and are more transparent towards end-client.

For example, ecosystems on land and in water absorb around half of man-made CO2 emissions; deforestation and forest degradation account for around 12% of these emissions; water is an energy intensive commodity [abstraction, transportation, treatment, heating], so water efficiency also means energy savings; fighting air and water pollution are also key determinants of more “social” SDGs, such as health, poverty and hunger.

EU Funds

Of course, it is not about substituting public finance with private capital; rather it is about getting both to work together towards sustainability.

EU funds, for example, also have a role to play. We are gradually integrating environmental objectives into all relevant major EU funds, and are assessing the possibility of continuing with this approach in the future.

There is a need for increased policy coherence, in particular concerning the Common Agricultural Policy and Cohesion policy, with the LIFE programme helping to reinforce environmental integration.

This direction will take us to a sustainable economy, low-carbon, resource-efficient, resilient and more competitive on the global stage: an economy that citizens really want. One that protects businesses that allows for the production and consumption of goods and services in more efficient ways. One that creates local jobs at all skill levels, and doesn’t harm the natural world upon which we depend.

Getting to that economy is a challenge that requires parallel action on several fronts and coordinated efforts. But it is also an opportunity for many to engage, including financial intermediaries, institutional and retail investors, supervisors and policy makers.