This paper is part of the Fide Foundation’s GET-2 ESG Think-Tank final report from the 2024 Oxford Congress, titled “Driving Change: Exploring Opportunities and Challenges in Accelerating Sustainable Finance.”
ABSTRACT
The transition to a just, low-emissions, climate resilient and nature positive future will require fundamental whole-of-economy transformation. This will require strategic transition planning across the system. While momentum is building in corporate transition planning, private sector plans have important dependencies on government policy. So, governments must take the lead and turn their Nationally Determined Contributions (NDCs) into strategic national transition plans that direct, incentivise and support private sector action.
Sustainability is on top of the agenda for financial services regulators as the exacerbating climate change and other environmental and social events increasingly threaten financial stability via physical and transition risks. The financial sector plays an important role in ensuring capital flows to more sustainable projects, financing the transition, and incorporating sustainability considerations in investment decisions and risk management, and last but not least providing adequate disclosures.
The Action Plan Financing Sustainable Growth adopted by the Commission in March 2018 (“the Action Plan”) made it clear that the financial sector has a crucial role to finance the transition of the EU towards sustainability and climate neutrality. Since then, we have been facing a transformation of our economic and social model. It is worth highlighting some of the measures on sustainable finance that have been taken by financial regulators and supervisors (“the regulators”) and how the financial markets and the corporates (“the markets”) have faced all those measures, as well as the challenges the public and the private sector have ahead.
In the last few years, we have seen an unprecedent wave of regulations and 2024 has been no exception. However, 2024 is a year of elections, and further significant regulatory changes are unlikely until policymakers engage with post-election political priorities in the EU, UK and US. In the coming months we will have more clarity on forward-looking sustainability policy priorities for financial services in relevant jurisdictions with relevant challenges to be overcome.
TOPICS ADDRESSED
On current policies, the world is well off-track in meeting Paris goals. The IPCC estimates warming of almost 2.8°C by 2100. Warming at these levels could leave much of the planet uninhabitable, with devastating human and economic consequences.
There is a need to accelerate whole-of-economy transformation towards a just, low-emissions, climate resilient and nature positive future.
Systemic transformation – at the necessary speed and scale – won’t simply “happen”. It requires strategic, but adaptive, transition planning across the system.
Pressure from regulators, investors and civil society has built momentum in private sector transition planning. Many tools are now in place – including tools to assess transition levers, disclose transition plans, and assess their credibility.
Corporates and financial services firms need clearer policy signals and incentives if they are to commit private capital for the transition. And there is evidence that well targeted interventions by government can help to unlock innovation: changing the economics of climate solutions; and accelerating behavioural change in the economy and society.
Currently, from a geopolitical point of view, there is uncertainty about the sustainability policy priorities for financial services in relevant jurisdictions. In the UK, the new Labour government has committed to making the UK `the green finance capital of the world’ via key initiatives on credible transition plans and aligning UK sustainability disclosure requirements with the ISSB and TPT frameworks. In the EU, the recent report leaded by Draghi challenges policymakers to enact a more competitiveness-focused agenda without downplaying climate aspirations. Finally in the US, the results of the forth coming elections may have an important impact on the regulatory agenda.
However, financial services firms need clearer policy direction of travel and incentives if they are to commit private capital for the transition. This includes clarity on the direction of fiscal and industrial policies, the rollout of clean energy infrastructure, and national investment needs. And it also includes clarity on regulatory measures to build trust and integrity in financial regulation. Indeed, we are experiencing a level of regulatory intensity combined with regulatory supervision that is impacting the capacity of the financial sector to operationalize the changes. Regulation should focus not only on new developments but also on covering relevant gaps and ensure consistency and adequate implementation,
The Action plan included 10 actions mainly dealing with new regulations that where needed to reorientate the capital flows. In 2024 most of the actions are in place: EU Taxonomy regulation, Sustainable Finance Disclosures Regulation (SFDR), Corporate Sustainability Reporting Directive (CSRD), European Green Bond Standard and Climate Benchmarks, among others. They have implied a big change for both sides: the regulators and the markets (and beyond them also the public and the private sector).
However, the fragmentation regionally and globally adds on the challenges that financial services firms are facing. Despite sustainability being a global concern there is not a real effort for further alignment. The focus should shift to facilitate better regulation, aligning trajectories and looking for consistency. There is a shared call for increased clarity and addressing gaps that should contribute to a more transparent and effective regulatory landscape.
As an example, regulatory divergence is pronounced in the approach to requirements to embed sustainability into the investment process and the associated disclosure expectations. In practice, this means that it will be challenging for a single fund product to comply with rules across all different regions and jurisdictions. Although the regulators share the same goal of mitigating greenwashing by driving transparency, there are fundamental differences in their approaches and scope of their rules
A recent Finance Watch report demonstrates that even with the full strength of capital markets – would only match a third of the EU’s essential investment needs. Public finance must step up in financing a transition to a sustainable economy. There is also an opportunity for private and public partnerships (including blended finance and derisking needed investments by public guarantees). Public finance must also play a role whenever investments are not very profitable but are very much needed to advance the transition.
We need action, so, governments must take the lead through national transition planning, at the centre of an integrated transition planning ecosystem.
National transition planning would build from countries’ current NDCs, Long-term Low Emission Development Strategies (LT-LEDS), and other existing plans and strategies. And it would anchor the design of investment and implementation plans in country platforms, and other similar mechanisms.
Strategic, credible, and suitably ambitious national transition planning can help to enhance confidence and trust in countries’ climate and sustainability commitments – steering a fair transition, while advancing climate resilience, sustainable development and energy security goals.
The policy debate is moving in this direction, with the Group of Twenty (G20) Taskforce on Global Mobilisation against Climate Change recognising both the need for, and the opportunity of, national transition planning. Civil society campaigns such as Mission 2025 similarly call on governments to show leadership as they develop their next NDCs.
To further the debate, a research project led by the Centre for Economic Transition Expertise at the London School of Economics and Political Science recently published a set of recommendations for national transition planning.
Working towards these recommendations can support governments’ delivery against international commitments in the Paris Agreement by helping them target resources and capital allocation more effectively. And it can give actors across the economy greater certainty, confidence and incentive to invest in the transition – thereby scaling private finance in both advanced economies and emerging market and developing economies.
Next steps
- Every actor has agency in the transition to a just, low-emissions, climate resilient and nature positive future. To deliver on the mission to accelerate whole-of-economy transformation:
- governments must work towards national transition planning as they prepare their refreshed NDCs for delivery in 2025.
- private actors must maintain the strong momentum that has already built in corporate and financial sector transition planning;
- EU must safeguard what it has achieved on the EU sustainable finance, ensure the consistency of rules and fill in the remining gaps;
- governments, businesses, financial institutions and civil society must continue to work together to build a vibrant ecosystem of data, tools, collaborative platforms and expertise.
- There is a puzzle of policies and regulation that is not easy to navigate. The complexity and number of regulatory developments requires a great effort to understand the requirements, anticipate impacts and align with the strategy and requires consistent implementation for its effectiveness.
Only in the first half of 2024 there were several developments of note. Some examples are the EU Banking Package, which includes ESG risk-related provisions, and the Corporate Sustainability Due Diligence Directive (CSDDD), that covers the upstream part of the chain of activities for financial undertakings (although the scope will be under review within two years following an impact assessment). Additionally, greenwashing continues to be high on the regulatory agenda. The FCA’s Anti-Greenwashing Rule came into effect on 31 May and the three European Supervisory Authorities (ESAs) published final reports on the risks of greenwashing and their supervisory approaches. On their side, global standard-setters have continued to progress their work programmes.
The CSDDD is of great importance as it requires that the largest companies set and implement climate targets, while CSRD lays downs what are the key disclosures to be made to ensure investors get the information to understand whether the transition plans are credible and be able to compare them across the companies.
Reducing fragmentation and aligning policy trajectories becomes crucial as the sustainability concern is global. It is time to identify properly what is missing, learn from mistakes looking for enhancements and ensure further effective regulatory implementation.
To that end, well calibrated, sufficiently ambitious but usable regulation can be an enabling tool to increase transition and sustainable investments. Robust corporate transition plans, including climate targets, are an essential component.
- Fiscal incentives can be a very powerful. EU-wide solutions are unfortunately currently not possible given that tax is a Member State’s competence. However, a meaningful European Commission’s recommendation suggesting Member States set tax breaks at national level to incentivise sustainable and transition investments would be useful.
- The United Nations showed in a report issued by the High-Level Expert Group on the Net-Zero Emissions that was presented in the COP 27, that while the curve of global emissions was bending, it was not happening quickly enough to limit temperature rise to 1.5°C.
The report included 10 recommendations whose aim was to “Move from pledges to action”.
Recently the report “The future of European competitiveness” known as the “Draghi Report”, includes as one of the actions needed in Europe a joint plan for decarbonisation and competitiveness.
The challenges for the public and the private sector in general (beyond the markets and the regulators), imply moving from pledges to action, and to do so we need a transition period that allows to reach the goals included in the European strategy and at the same time guarantees competitiveness and information.
We need a plan that combines both decarbonisation and competitiveness objectives, while also advancing wider environmental and societal goals. This recognises that sustainability and sustainable finance are effectively the means to achieve a sustainable growth and long-term value creation.
AUTHORS
Mark Manning
Visiting Senior Fellow and consultant, LSE Grantham Research Institute
Aleksandra Palinska
Executive Director EUROSIF
Ana Martínez-Pina
Financial Regulatory Partner at Gómez-Acebo & Pombo
Pilar Galán Gavilá
Head of Financial Services Legal, KPMG España
Oxford/24 Final Report:
This paper is part of the Fide Foundation’s GET-2 ESG Think-Tank final report from the 2024 Oxford Congress, titled “Driving Change: Exploring Opportunities and Challenges in Accelerating Sustainable Finance.” Held at Jesus College, Oxford on September 18th, 19th, and 20th, 2024, the Congress brought together world leaders in finance, regulation, and sustainability. This comprehensive report consolidates key insights from the event, offering strategic recommendations to financial institutions and regulators on transitioning to a low-carbon economy and reaching net-zero greenhouse gas emissions by 2050.
The full report can be found at: https://bit.ly/oxf24-report
