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ESBG responded to the European Commission High Level Expert Group (HLEG) questionnaire on its sustainable finance interim report
According to ESBG, several issues need to be addressed to move towards sustainable finance. The main challenge today is to come up a coherent definition of “green/sustainable assets". This should not only include “green bonds" but all kinds of assets which contribute to a society which is accepting “climate change" as a threat to our future and will do everything possible to reach the 2°C target (COP21). Sustainable development requires sound economic policy underpinned by coherent financial regulation that allows for long-term investments by both governments and private investors. There is a long tradition in fostering inclusive growth throughout Europe via providing SME financing using customer deposits. In order to achieve sustainability, it is important to remove barriers to long-term financing. ESBG is of the opinion that sustainability requires a significant increase in green infrastructure investments. The strict ECB monetary policy and low interest rates makes it more complicated for banks to accelerate their long-term lending capability to SMEs. Despite the low interest rates, SMEs are still turning to banks for business loans more than other sources of financing (such as bonds or equity issues). This is due to lower transaction costs, lower disclosure obligations, the possibility to acquire small amounts of money and that the equity market is not as developed for SMEs as it should be.
A certain level of flexibility and proportionality will be needed to ensure the clarified fiduciary duty can be applied across the investment and lending chain and its many different financial instruments, building on the existing principles in relevant EU legal texts. This should ensure that material ESG factors are integrated into the national definitions of fiduciary duties. In that sense, we welcome any capital benefit/relief that would foster the growth of sustainable assets. However, it must be ensured that this would not trigger heavy and resource intensive reporting or disclosure requirements.
Policy -makers and legislators should be in contact with the industry to ask for their views as much as possible, throughout all their work. This can be done via consultations and bilateral meetings, early on in the process and not as a final step only.
When it comes to EU taxonomy for sustainable assets and financial products, we believe that sustainable assets need to become a mainstream product and a key part of economic activity. Therefore, all investments and innovations that improve productivity and dematerialise economic activity (e.g. saving resources, promoting a circular economy, 3D printing, reducing greenhouse gas (GHG) emissions) are sustainable investments. On the other hand, at the moment it is important to promote specific projects related to the COP21 goal of 2ºC, and, on a wider scale, the seventeen SDGs. Long-term infrastructure investment should become a key component of economic policy and should be done in a way that crowds in private capital. To do so, financial regulation must be aligned with sustainable development.
It is vital that a wide range of banking products are included in an EU taxonomy, such as green certificates of deposits which are often launched by local banks and Sparkassen in Germany.
When establishing a European standard and label for green bonds and other sustainable assets, the EU must ensure high-quality standards and labels in order to avoid misuse and green-washing. To do so, transparency and reporting are two of the key considerations to be kept in mind. If the EU wants to endorse sustainable activities in the financial sector, it would be better to create a label for outstanding financial companies in sustainability, in different categories (e.g. retail banking, insurance, investment banking), rather than a financial instrument. In addition, including experts from all types of financial institutions into high-level groups would allow for a broader pool of experience when coming up with new ideas.
In order to best align the investment and analyst community with long-term sustainability considerations in the real economy, the main levers to align investors and analysts with long-term sustainability are regulations such as establishing a relevant price on externalities not included in current prices. For example, a price (or tax) on carbon which is high enough to promote the transition to renewable energies or to develop carbon-capture technologies. In general a realistic CO2 tax on any kind of product would be the best tool to allocate investments and to influence consumption. To define the right level of a CO2 tax is the challenge. The same principle could apply for improving water consumption efficiency, especially in agricultural activity, reducing waste and energy efficiency.
Another action which would help move towards long-term sustainability is to change the practice of quarterly reporting into annual requirements. However, as long as the general economic system is based more on short-term incentives than on long-term targets this will be a challenge.
Finally, the EU decision makers should recognise the crucial role that banks play in intermediating between lenders and borrowers, in particular the percentage of savings banks' activities which cover SME and private households lending. Promoting these activities further will be beneficial to the real economy.
When it comes to involving insurers more strongly on sustainability, particularly through long-term investment, ESBG believes that savings and retail banks should be able to finance sustainable projects and investments and be allowed to securitize (at least) parts of these assets to sell to insurers as a long-term investment. If Member States guarantee instead of finance such sustainable infrastructure projects, then it would be a better alternative to long-term sovereign bonds.
As for mobilising private capital for social dimensions of sustainable development, the greatest challenge might be to create projects in the real economy with an acceptable risk-return-profile for the financial industry and for private investors.
Private capital will only be used to invest in long-term sustainable projects if, in addition to an acceptable return on investment, these projects are secure and have a positive impact on our society.