It is a rare privilege in life to find a piece of work that pulls together everything you have learned in your life, and to then find that it is your job to undertake it.
This happened to me recently when I persuaded my colleagues in the European Parliament’s Economics and Monetary Policy committee to sponsor a report into sustainable finance. This is a huge agenda that, if it works well, could use the power of finance as a lever to shift the whole European economy in the direction of sustainability – while simultaneously starving destructive sectors of vital investment.
When I mention this concept, people often respond by talking about divestment campaigns, which call for universities or public bodies to shift their money from fossil fuel assets to renewables, like the one led by Green councillor Carla Denyer which has resulted in a major divestment by the University of Bristol.
Divestment is indeed a great start, but it can often seem like a moral appeal. The reality is that fossil fuel investments are ‘stranded assets’, meaning that as we strengthen policies to tackle climate change, they will lose value. The key to the sustainable finance agenda is making sure that this process happens in an orderly way.
The need for an orderly transition and clear market signals is why financial companies are not opposing the sustainable finance agenda and, in fact, are often supportive – especially the insurance companies, which are already seeing the threat climate change poses to their business, and the pension funds, managers of which need clear signals about how they will be able to generate value for their customers in the long term.
The first priority is carbon stress tests for banks – a process of checking out what proportion of the assets they have that ensure they are solvent are linked to fossil fuels. The European Systemic Risk Board has a group looking into how such a project might be undertaken. Since it protects the European financial system against systemic risks its decision about which assets have long-term value is vital.
Which brings us to definitions. It has been really exciting for me this past year – as the world’s first and so far only Professor of Green Economics, at the University of Roehampton – to see how we are beginning to define sustainable assets in the economics committee rather than the environmental committee. European politicians are acknowledging what Greens have long understood – that if we destroy the planet we will not be able to generate any economic value.
The European Commission has proposed a ‘taxonomy’, a way of categorising the sustainability of different kinds of assets. It begins with climate-positive investments, moves on through the circular economy, reducing pollution, and cleaning up waterways, and will eventually include socially beneficial and well governed businesses.
Because the EU is a financial regulator, the European Supervisory Authorities can determine which assets are considered viable when determining whether banks are solvent or pension funds will be able to afford to pay out. So if we as regulators take the initiative to legislate that coal mines or intensive farms will not be viable assets after, say, 2030, we will ensure an orderly transition away from these assets and towards the assets of the future, like wind farms and organic farms.
This is the promise of the sustainable finance agenda: use finance as a lever on the whole economy. It is at its early stages, but it helps us to create the incentives to ensure that future investment is compatible with the Paris Agreement – and eventually with a whole raft of environmental, social and governance standards.