4 QUESTIONS FOR…
Lucia Alessi, Team Leader for Financial research at the European Commission Joint Research Centre, on bringing together science and sustainable finance
BRUSSELS, 5 December 2022
Sustainable finance plays a fundamental role in delivering on the policy objectives under the European Green Deal. While the EU policy makers have rolled out an ambitious sustainable finance framework, a lot of work remains to be done. To ensure that private investments are directed efficiently, combining policy with scientific knowledge is necessary. In this respect, we support the magnificent work of the European Commission’s Joint Research Centre (JRC) in developing research to support European policies.
In our interview with Lucia Alessi, we not only explore the work of the JRC, but also the role of the newly launched Sustainable Finance Research Forum, of which she is Chair, and which serves the purpose of strengthening knowledge sharing between the financial sector and research community. As our Chief Policy Officer, Sébastien de Brouwer, stated at the launch event of the Sustainable Finance Research Forum “Our common objectives could only be achieved if we all work together, trust each other and support each other with facts, expertise and experience”.
- The Joint Research Centre (JRC) is the European Commission’s science and knowledge service providing scientific evidence throughout the entire EU policy cycle. Can you further explain the role and some of the main accomplishments of the JRC?
The Joint Research Centre’s main responsibility is to carry out research and manage knowledge in order to provide independent scientific advice and support to EU policy. All JRC scientific publications are also available free-of-charge on our website and they often make it into top scientific journals. Looking at Economics and Finance in particular, JRC ranks 30th out of over 8600 institutions as measured by RePeC.
Following the global financial crisis, the JRC has been supporting EU initiatives to increase the resilience and competitiveness of the EU financial system. In particular, the JRC has developed analytical tools and quantitative models to monitor risks and evaluate policy options in the areas of bank capital requirements, bank and non-bank recovery and resolution, and deposit insurance.
Recently, the JRC has worked on the financial stability implications of the introduction of a European Safe Asset. Currently, the JRC is supporting the Commission’s review of the EU bank crisis management and deposit insurance framework together with Directorate-General Financial Stability, Financial Services and Capital Markets Union. In the context of the debates on the completion of the Banking Union, the JRC also analysed the impact and design of a possible European deposit insurance scheme (EDIS). In this respect, the JRC has calculated that EDIS would further improve the resilience of the EU banking system by reducing the likelihood and the size of a liquidity shortfall of national DGSs by 80%-90%.
With the emergence of new risks and opportunities related to sustainable and digital finance – in particular, since the launch of the two relevant European Commission’s Action Plans in 2018 – the JRC has intensified research efforts in relation to relevant policy initiatives in these areas.
- In light of the increased focus on sustainable finance, how has the JRC contributed to sustainable finance initiatives in the EU?
The JRC, first and foremost, supported the development of the EU Taxonomy for sustainable activities by providing a conceptual framework, methodological guidance as well as technical input to the Technical Expert Group and the Platform on Sustainable Finance. This included contributing to the definition of the EU Taxonomy’s key concepts and methodologies and developing technical screening criteria.
The JRC also regularly monitors green bond issuances in EU member states. To support the development of an EU Green Bond Standard, the JRC has filled important knowledge gaps in the academic literature, including:
- The analysis of pricing on primary markets, showing that green bonds can be a cheaper source of finance than conventional bonds for companies and governmental issuers;
- The assessment of the effectiveness against climate change, finding that green bond financing is effective in promoting less carbon-intensive activities;
- The investigation of bond portfolios held by institutional investors, documenting that green bonds were more resilient than conventional bonds during the COVID-19 outbreak.
In addition, the JRC has carried out the technical analysis underlying the development of an EU Ecolabel for financial products and also collaborates to strengthen the For example, the JRC supports the work of the European Systemic Risk Board: it provides data on natural disasters from the JRC risk data hub and scientific evidence on transition and physical risks related to climate change. In this respect, we have papers on investor’s exposures to transition risk, climate stress-testing for banks, the pricing of transition risk in the stock market, the quality of firm-level emission data, and are looking into financial risk from natural disasters for banks and insurers.
Finally, the JRC is at the forefront of efforts in assessing the financial consequences of biodiversity loss and ecosystem degradation.
- On the 27th of October, the JRC launched the Sustainable Finance Research Forum. What is the aim of this new platform which will bring together academics, policy officers and financial sector practitioners?
Clearly, investors need reliable tools and sound evidence to navigate a changing business environment where sustainability is becoming one of the key drivers. They also need sound methodologies to identify new categories of risks and address them adequately. However, it is not necessarily their core business to assess data quality, overview the existing academic literature with a critical eye, keep abreast of recent scientific developments, and translate scientific findings into actionable business decisions. This is why we have set up the Sustainable Finance Research Forum.
The Sustainable Finance Research Forum is an action in the European Commission Strategy for financing the transition to a sustainable economy. It aims to ensure that the necessary developments in the theory and practice of sustainable finance and investment are informed by high quality, rigorous scientific research.
Against this background, the Sustainable Finance Research Forum will promote scientific excellence and encourage knowledge sharing on sustainable finance between the academia and the industry. It will strengthen the role of science in sustainable finance by providing an open platform to discuss approaches and experiences with the financial sector’s community. In particular, it will aim on the one hand, to increase investors’ appetite for sound research on sustainable finance and related data and intelligence, and on the other hand, to influence the direction of research and unleash the potential of science based on sustainability-related data.
- In which areas do you believe more research is needed? What can be expected in the short-term from the work of the newly created research forum and how can the banking industry contribute to its work?
The Forum will consider both ‘sides of the coin’, meaning sustainable investments, on the one hand, and financial risks from sustainability factors, on the other.
Research on green finance includes investigating whether and why investors consider sustainability, and how relevant markets work. A key issue is the assessment of the Paris-alignment of the financial sector: for this, we need to know where we stand, and where we should be. Hence, we need data, or estimates, as well as model-based trajectories – and we need them urgently, as the “make or break” decade has begun.
On risks, financial institutions need science to assess, analyze, and act. Traditional approaches will not work: ESG risks are different from a recession. Think of climate: the low-carbon transition or a large temperature increase will happen over some decades, not in one day like a market crash. So, they are not ‘shocks’. How can we then incorporate long-run processes into stress-testing models with a 3-5- year horizon? I believe the way is to fully account for financial amplification mechanisms.
Another key area both for academics and investors relates to sustainable finance in low and middle-income countries. The Commission has set up a High-Level Expert Group (HLEG) to assess challenges and opportunities. Also, with a view to providing support to the work of the HLEG, we will organize an event on these themes early next year. Still in 2023, we will hold the 5th edition of the JRC Summer School on Sustainable Finance.
To answer these and other crucial questions, we need the help of the industry. Researchers need expert knowledge to tackle specific questions and they need to know the practical issues faced by professionals, but most of all, they need disaggregated data on bank’s assets to help banks to assess the greenness and ESG risk exposure of their loan and securities portfolios.
For more information:
Alexia Femia, Financing Sustainable Growth Adviser, email@example.com