EU Strategy on Sustainable Finance

Spotlight Activity: EU Strategy on Sustainable Finance

On March 8th, the European Commission published an Action Plan delineating a roadmap to sustainable finance. The Plan builds on the report published in January of 2018 by the High-Level Expert Group (HLEG) on sustainable finance, a group formed at the end of 2016 to develop an overarching strategy in this area.

Finance is a key aspect to the success of the Paris Agreement, and it was calculated that additional investments of €180 billion per year are needed to achieve the EU’s climate and energy targets agreed in Paris. For this reason, the Commission’s Action Plan on sustainable finance provides direction on how to integrate sustainability considerations into its financial policy framework in order to mobilize finance for sustainable growth.

The plan provides solutions for the following challenges:

  • No common definition of ‘sustainable investment’
  • Risk of ‘greenwashing’ of investment products
  • Banks and insurers often give insufficient consideration to climate and environmental risks
  • Investors often disregard sustainability factors or underestimate their impact
  • Too little information on corporate sustainability-related activities

Legislative proposals for the adoption of new regulation is expected by the fall of 2019.

This is the first known attempt of the integration of sustainability into a financial system. To the author’s knowledge there are no similar initiatives at the World Bank or other development banks. Thus, to set an example it is in the European Commission’s interest to design an effective scheme in prioritizing financing to low-carbon projects. If successful, the model can be replicated in other national and international settings with the potential for enormous impact.

Status: Right Direction

The integration of sustainability in the EU financial framework is a crucial step to prioritize funding for projects that will help achieve commitments under the Paris Agreement. The ultimate impact of the sustainable finance strategy will depend on its final design, which will be developed over the next year and a half. However, this activity deserves attention as other countries and financial institution explore new mechanisms to finance projects with a climate mitigation component.

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