The EU’s financial reforms have the power to influence investments across all sections of the economy and to shape the way national budgets are allocated

At the end of 2019, EU member states approved hard-won legislation establishing a framework to define green investment — the so-called taxonomy of sustainable economic activities. The new tool will incentivise green investment and sets a standard that may become a basis for action inside and outside Europe. The decision marked the end of an extraordinarily productive year for the EU’s sustainable finance policy agenda which has seen a wide array of reforms across all parts of the financial system. In 2019, shareholders of the European Investment Bank agreed to end fossil fuel financing by the world's largest multilateral lender, setting a new standard for development banks worldwide. The European institutions, meanwhile, agreed a long list of financial reforms. These included requiring investors to consider their social and environmental financial risks and the impact of their activity on the environment, asking index providers to disclose how far their portfolios align with the Paris Agreement on climate change and to take action to incorporate sustainability considerations into capital requirements for banks, the mandates of European financial supervisors and the advice investment firms offer to individual clients. What is more — this is only the beginning. Days after entering office, the new European Commission announced detailed plans for a European Green Deal, including a host of initiatives that will be rolled out from 2020. The deal is priority number one for the Commission and puts climate change at the heart of EU policy, aiming for Europe to become the first climate-neutral continent. Financial reforms will be a central part of the deal and, together with education and innovation, are seen as key enablers of the EU economy’s journey to producing net zero greenhouse gas emissions by 2050. The EU taxonomy plays a crucial role, setting out the direction of travel for investments in key economic sectors over the next 30 years and establishing a body to monitor progress to ensure the EU directs investments to where they are needed most. The EU plans further financial reforms in 2020 in the public and private finance sectors, as well as support for member states in greening their national budgets. The key public finance action has already been launched, the Sustainable Europe Investment Plan, set to deliver: “€1 trillion of investment over the next decade in every corner of the EU.” On the private sector side, the EU will also put the spotlight on companies, pushing harder for disclosure of sustainability data to support investors in making sustainable investment decisions while incentivising improvements in corporate governance. Last, but not least, autumn 2020 will see the launch of a new EU Action Plan on Sustainable Finance setting out future actions. The EU’s financial reforms have the power to influence investments across all sections of the economy and to shape the way national budgets are allocated. If this ambitious vision can be delivered in a coordinated manner, with strong links to policy changes in the real economy and no contradictory policies, the EU will be unstoppable in its quest to become the first climate-neutral continent. Yet, this is easier said than done. First, sectors which stand to lose out from decarbonisation, like natural gas, will attempt to make the transition away from business-as-usual as difficult as possible. Second, climate change poses financial stability risk to the European and global economy through rapid economic transition and through increasing climatic impacts, as well as through second order effects such as supply chain shocks. These could knock the EU off track. Lastly, the European economy is already in a somewhat vulnerable state. Any serious financial downturn has the potential to distract leaders from the pro-investment agenda that is required for rapid decarbonisation, although it also brings new opportunities for reform and green stimulus. With its current pace and scale of reforms, Europe is establishing the financial rules of the future. It should not stop here — the finance sector has huge potential to transform Europe's industry to go from dirty polluter to clean leader, while also avoiding the economic risks posed by climate change and delivering socially sustainable investment to all corners of the EU. Finance sits at the heart of the European Green Deal and is the means through which it will achieve its goals.

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