SUSTAINABLE FINANCE ROUNDUP
‘Regulatory perspectives on promoting sustainable finance in Europe’, UNEP FI Regional Roundtable Europe 2023
Burçak Inel, the EBF Director for Financing Sustainable Growth, participated in a panel discussion at the 2023 UNEP FI Regional Roundtable on “Regulatory perspectives on promoting sustainable finance in Europe” together with representatives of the European Central Bank and the European Commission.
Burçak told the audience that banks have intrinsic reasons to commit to sustainability, beyond regulation: society is more sensitive to environmental issues, customers’ needs are changing and so are today’s leaders. And most importantly, sustainability is a way to improve the financial performance of banks and to protect banks against risks and allow them to grab opportunities. This results in banks having to consider sustainability at the core of their business strategies, and not merely as an add-on or as a compliance exercise. Sustainability seen in this way is not business as usual – it affects all business lines of banks. The regulatory framework should reflect these internal drivers of change and complement and enable these efforts.
She noted that Europe has reached an important stage where the key pieces of the sustainable finance regulation are finalized. It is important now to provide feedback to the regulators in order to finetune the regulatory framework, remove inconsistencies and possible unintended consequences and encourage further convergence with international standards, where desirable, to limit complexity and encourage a level playing field. In this regard she stressed that it was right for the EU to commit to double materiality since understanding impact inside-out is “absolutely fundamental to reach net-zero targets.’’
In Burçak’s view, banks play a key role in the sustainability transition not only because more than 70 percent of external financing of companies in the EU comes from banks, but also because banks act as intermediaries in capital markets which provide financing for innovative companies and sustainable investment opportunities for savers. Representing 40% of global banking assets, banks have committed to bringing down the emissions from their lending and investment portfolios to ‘net-zero’ by 2050. As a first step, they had to analyze their portfolios, understand where they have the most material impact, and set emission reduction targets. This was not easy, but setting targets has been easier than implementing them. Banks are now at an important point where they need to act on their commitments that reflect the varied contributions they can make to sustainability.
As one major challenge, the implementation of the sustainable finance framework continues to reveal gaps and inconsistencies, which undermine the objectives. Moreover, financiers’ efforts are complicated by the fact that there are not sufficient changes in the underlying economic activities as shaped by broader economic policy.
Indeed, the ultimate success of these efforts will depend on the action and interaction of all players. Investments need to make economic sense for those that decide to undertake them; it is therefore important also to have clarity on government actions, on infrastructure projects, subsidies and incentive programs that will all affect the economics of the activities. Investments need to happen before they can be financed. The sustainable solutions need to be found; then these need to be economically feasible and facilitated, for instance by way of subsidies or tax incentives. The banks can then operate as the middleperson, but they are not the owners of investment decisions.
Burçak stressed the importance of transition plans and called for sectoral decarbonization pathways adjusted per geography when relevant, with these being the key to understanding the credibility of companies’ transition plans. These elements are key when it comes to financing transition.
Finally, she spoke about the importance of SMEs, which are, collectively, a fundamental part of the transition. European SMEs will need help in order to be included in the transition, while avoiding their overburdening as they will be requested ESG information both by larger companies, of which they form part of the value chain, and banks in their efforts to evaluate the risks and impact of their portfolios (which include SME financing).
In conclusion, the overall event acknowledged that sustainability is no longer a choice but an imperative. It paid tribute to the progress made so far and to the leading role of the EU. With the sustainable finance framework almost entirely rolled out, the European Commission will now take a step back, as we shift into the implementation phase. It is now time to see how the framework works on the ground and whether, in the coming years, significant progress takes place in achieving ESG goals. However, realistically, some time will need to pass before the effects of the framework can be thoroughly assessed, with the availability of data only gradually improving over the next years and all stakeholders struggling to learn how to deal with the complexities of this new topic.
This is where we are now: from commitments to implementation. In that sense, the real challenges are still ahead of us. In the end, the overall success will depend on the progress of all – governments, companies and finance providers, with all actors ultimately being judged on actions, not words.
For more information:
Alexia Femia, Financing Sustainable Growth Adviser, firstname.lastname@example.org