The EU setting the pace for sustainable finance across the world

During 2019, issues related to sustainable finance have gained momentum throughout the world (Goldman Sachs pledging to invest more than $750 billon in ESGs by 2030 in December 2019) but especially in Europe and more precisely in the EU. This issue has indeed become the cornerstone of EU policy. The EU Green Deal demonstrates the extent to which sustainable finance is becoming an increasingly crucial issue.

The rise in awareness of sustainable finance in the EU stems from long before the EGD in 2019. Indeed, a major interest has been centered around sustainable finance for the past years. This is demonstrated by the 2016 creation of the High-Level Expert Group on Sustainable Finance. This group includes about 20 senior experts in all domains and one of its main aims is to help the EU protect the stability of the financial system against environmental risks.

The European Green Deal, set forth in December 2019 in order to make the EU climate neutral by 2050, takes a step further for green finance and displays a proactive approach. For example, in Q1 of 2020, the Commission has planned to launch a public consultation on a renewed sustainable finance strategy that will be presented in Q3 2020. Most importantly, the Commission is trying to aim homogenization. Indeed, its main aim is to establish an EU Green Bond Standard and examine how it can increase both public and private finance for green and sustainable investments. The investment plan of the EGD is expected to mobilize at least €1 trillion of sustainable investments needed for the transition to a climate-neutral economy.

All these moves have demonstrated the EU’s will to be a prominent actor in this domain. Following the cooperation put in place between the EU and the IMF to support sustainable development in 2019, Managing Director of the IMF, Kristalina Gerogieva drew attention to the avant-garde role of the EU played in sustainable finance: “We appreciate the EU’s leadership on sustainable development for all. We have a history of working together in building strong economic institutions to improve economic performance and the livelihoods of people in our partner countries. This Agreement will deepen our collaboration and help us do more together, especially where it matters the most — in low-income countries and fragile states.”

Throughout this statement, we can understand that the EU has not only made it its will to reform the domain of sustainable finance within the continent but also at a larger and more international level.

In his book Norms over Force: The Enigma of European Power, Zaki Laidi mentions that the EU can never be a superpower, however it is and can potentially be a “normative power”. This denomination can be used in the case of the Green Deal but also the development of the European Green Bond Market. Indeed, the EU’s normative bodies expressed their desire to monitor and regulate more its green bond market.

The European Commission decided in December 2019 to adopt new legislation concerning green, or also called sustainable, bonds. When issued, the issuers of the bonds need to declare the percentage that is environmentally friendly. The deal will especially be classifying the bonds in 3 categories: from the least green type to the greenest one. The EU has, therefore made significant efforts in order to establish an EU green bond standard and taxonomy for the mentioned products. Any member state of the EU will need to apply the framework implemented by the Council, aiming to create a more homogeneous market for green financial instruments. These taxonomy requirements will need to be fulfilled by 2021 by the EU member states as well as financial market participants in the EU. All these efforts are made to make the EU green bond market mature and improve the credibility of green bonds at a broader scale.

Sustainable investing across the world

Sustainable investing across the world

Europe is doubtlessly a very dynamic market for green bonds and green financial instruments, and the growth has been exponential for the past years. For example, in 2008, there were few actors in the European green bond market, indeed, it mainly concerned States and investment banks. However, in 2018, 145 entities issued green bonds in Europe, representing a third of those in the world. The EMEA region has therefore made headways in terms of volume compared to all other geographic regions. For example, in 2019, EMEA accounted for more than 74% of volume in global green and ESG loans. It is safe to say that most of these loans are emitted by countries in Europe and more precisely countries of the EU.

As a leader in sustainable finance, the EU has made the pledge not only to be a normative power that regulates its own market, but it has taken the initiative to set the tone on a worldwide scale, as demonstrated by the cooperation with the IMF. Europe was the first to step on the ground of the nascent market of green bonds and it intends to stay.

Authors: Oumaima Sadouk, Edoardo Castangia

Sources:

https://ec.europa.eu/info/events/finance-190321-sustainable-finance_en

Click to access european-green-deal-communication_en.pdf

https://www.weforum.org/agenda/2020/01/sustainable-finance-starts-with-data/

https://www.lexology.com/library/detail.aspx?g=096b5719-9b3a-48bb-b3b8-c4c981ae3f4b

https://www.unenvironment.org/news-and-stories/press-release/dutch-government-and-rabobank-announce-anchor-investments-agri3-fund

https://ec.europa.eu/commission/presscorner/detail/en/ip_20_126

https://www.reuters.com/article/us-eu-finance-climate/green-bonds-set-for-shake-up-as-eu-agrees-rules-for-sustainable-financial-products-idUSKBN1Y9251

https://gsh.cib.natixis.com/eu-taxonomy

https://www.reuters.com/article/goldman-sachs-environment/goldman-sachs-pledges-750-billion-to-environmental-causes-by-2030-idUSL1N28Q0RL

Click to access the_green_bond_market_in_europe.pdf

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