Sustainable Finance: The European Regulatory Response To Environmental, Governance And Social Risk.
Legal News & Analysis - Asia Pacific - Regulatory & Compliance - Banking & Finance
26 February, 2019
On 8 October 2018, the Intergovernmental Panel on Climate Change (IPCC) released its Special Report on the impacts of global warming of 1.5°C above pre-industrial levels and related global greenhouse gas emission pathways[i]undertaken in the context of strengthening the global response to the threat of climate change, sustainable development and efforts to eradicate poverty. The IPCC recommended that in order to limit warming to 1.5°C would require a roughly fivefold increase in average annual investment in low-carbon energy technologies by 2050, compared with 2015. This requires a USD 2.4 trillion investment in clean energy every year through to 2035 and a cut in the use of coal-fired power to almost nothing by 2050.
Furthermore, the World Bank Group has stated, "The financing required for an orderly transition to a low-carbon, resilient global economy must be counted in the trillions, not billions".[ii] It has made clear that significant investment in infrastructure is needed over the next 15 years — around USD 90 trillion by 2030. Moreover, it stated, "Climate action offers a major opportunity to ensure sustainable global development and boost economic growth. It is already delivering real results in terms of new jobs, economic savings, competitiveness and market opportunities, and improved wellbeing for people worldwide with even greater investment, innovation, and growth potential ahead. The IFC estimates that the nationally determined contributions of 21 emerging market economies alone represent USD 23 trillion by 2030 in investment opportunities. Overall, a shift to low-carbon, resilient economies could translate into USD 26 trillion in global economic benefits through to 2030. Concessional climate finance is critical to supporting developing countries to build resilience to worsening climate impacts and to catalysing private sector climate investment".
Resolving these challenges will therefore require:
- new, innovative and at times highly disruptive technologies and approaches (renewable energy, batteries, electric vehicles, smart grids and smart cities, new processes like block chain and using satellites for data collection, water, transport (aviation, shipping and electric vehicles), climate smart agriculture and sustainable landscapes) and the investment in new infrastructure that supports such change and is increasingly resilient to climate change;
- governments committed to the 2015 Paris Agreement on Climate Change and with the vision to support such change through removing regulatory barriers and developing new forms of regulation to support a changing economy; and
- financing this transition and driving such finance into the low-carbon economy but through a combination of public, private and philanthropic finance all working together.
t is within this context that the sustainable finance agenda has taken off around the world. The UN Environment Inquiry into the Design of a Sustainable Financial System to advance policy options to improve the financial system's effectiveness in mobilising capital towards a green and inclusive economy has found some 267 sustainable finance measures in 53 jurisdictions. In the UK, for example, since last October the government has finalised a Clean Growth Strategy, an Industrial Strategy and a 25 Year Environment Plan, and has also launched a new Green Finance Institute. The Bank of England has released a paper on climate change and the macro-economy, broadened its prudential supervision of climate risk to include banks and formed a network of central bankers for Greening the Financial System. The Clean Growth Strategy aims to "phase out the use of unabated coal to produce electricity by 2025".
Europe's agenda is more ambitious. The European High-Level Expert Panel on Sustainable Finance and the European Commission's Sustainable Finance Action Plan seek to steer capital towards sustainable investments and protect the financial system from sustainability risks like climate change. The Commission is also updating responsibilities for directors and fiduciaries in the financial sector and bringing in new prudential and reporting requirements.
This briefing considers the regulatory response to sustainable finance in Europe to date, what to expect in 2019 and what financial services firms should be doing in response.
For further information, please contact:
Martijn Wilder Partner, Baker McKenzie
[i] See the Decision of the 21st Conference of Parties of the United Nations Framework Convention on Climate Change to adopt the Paris Agreement.
[ii] See http://www.worldbank.org/en/topic/climatechange/overview [accessed 10 January 2019].