16 April 2024

Harnessing the financial markets for sustainability

| The European |

By adopting the Paris Agreement on climate change and the UN 2030 Agenda for Sustainable Development in 2015, governments from around the world committed to pursue a more sustainable path for our planet and our economy. As current levels of investment are not enough to support an environmentally and socially sustainable economic system, the financial system has a key role to play here.

As a Europe has to close a yearly investment gap in the energy sector and related infrastructure of an estimated €175-290bn to achieve climate-neutrality by 2050. To help close this gap, the European Commission announced its action plan on financing sustainable growth in March 2018, as part of the Capital Markets Union’s efforts to connect finance with the specific needs of the European economy to the benefit of the planet and our society.

The action plan, which consists of 10 actions, has three objectives: reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth; manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and foster transparency and long-termism in financial and economic activity.

In particular, action 2 is to create standards and labels for green financial products, building on the future harmonised EU-wide classification system – or “taxonomy” – that will set criteria for determining which economic activities substantially contribute to meeting environmental objectives. One of the financial instruments addressed are the so-called “green bonds” that allow entities (companies, banks, governmental organisations, etc.) to borrow money from investors in order to finance “green” investments. While the green bond market has been expanding rapidly in recent years, it still accounts for only around 2% of global bond issuances in the last two years. Drawing on current best practices, an EU standard accessible to market participants would facilitate channelling more investments into green projects and would serve as a basis for the development of reliable labelling for certain financial products within the EU eco-label framework.

As a first step, the European Commission established a Technical Expert Group (TEG) on Sustainable Finance in July 2018. One workstream of this expert group focuses on formulating principles and recommendations for an EU Green Bond Standard (EU GBS). The overall ambition of the TEG is to determine the desirable features of a potential EU GBS and of its accompanying ecosystem. In its final report, the TEG will, amongst other things, define the key elements of a potential EU GBS based on existing market standards. It will also recommend an appropriate verification and accreditation system to further enhance credibility; provide for systematic reporting including on impact, and elaborate on possible incentives to enhance the growth of green bond issuance.

The TEG released a draft EU Green Bond Standard on 6 March 2019, for public feedback and comments
and will present its final report to the European Commission in June 2019.

Further information

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