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Opinion 05 March 2021

On the road for a greener Europe

Sustainability is undoubtedly one of the issues at the top of the agenda for CEOs today.  So far there has been significant progress, but there is still a lot of work to be done, and this is everyone's responsibility. Ricardo Laiseca, Head of the Global Sustainability Office, and Arturo Fraile, expert in financial regulation, analyse the path towards a green transition of the European financial system and share their strategic vision of how to achieve a more sustainable Europe in this article published in the newspaper El Economista.

Sustainability has been on the agenda of corporates, regulators and investors for a long time. So far there has been significant progress, but there is still a lot of work to be done, and this is everyone's responsibility. 

Being greener is the only way to shape the future of Europe and build more sustainable businesses. This can be achieved through a fair transition that puts society at its core, does not leave anyone behind and gives every sector and company the chance to transform, to be a part of the solution.

A greener Europe can become a reality through four main levers: public-private coordination for financiancing the green transition; the use of digital technologies to maximize the positive impact of public programs and funds, such as the Next Generation EU–COVID-19 recovery package; some adequate market incentives for a discrimination in favour of the best green options in risk-returns terms; and an improvement and homogenisation in the disclosure of non-financial information. These four levers are key to ensuring that the financing of the transition contributes to creating labour intensive jobs and a more digital and greener productive system.

Digitizing sustainable finance can be a real game changer

This effort of financing the transition must promote the transformation of the whole economy. The taxonomy needs to be further expanded to allow all sectors and companies to transform. Their gradual improvements should be recognized if they are congruent with the transition to a low-carbon economy or/and with the ambition of the EU’s net zero emissions objective in 2050. Extending the scope of the taxonomy framework would contribute to incentivize sustainable finance mobilization, an EU top priority.

A greener, and a more sustainable Europe that also considers the social and the governance dimensions, is everyone’s responsibility. Public-private coordination is key. Policy makers and the private sector should jointly design and implement a clear and solid framework to make the most of future investments.

Digitizing sustainable finance can be a real game changer. Generating, storing and processing an unprecedented volume of data allows financial entities to offer solutions that help our clients to improve their financial health and transitioning towards a sustainable future; and at the same time carrying out a data-driven and rigorous analytical approach, which is of the utmost importance for better risk measurement and management.

On their part, policy makers have three tools to incentivise the actions of the private sector:  pricing carbon emissions to properly internalize its cost; developing deep capital markets that incentivise a positive discrimination for ESG emissions, as well as implementing fiscal policies aimed at polluters pay and non-polluters benefit.

An efficient and scalable voluntary carbon market can be a valuable tool to speed up the transition

In this sense, it is essential to have European policies that drive credible, long-term oriented pricing for  emissions and encourage the transition to net zero emissions. An efficient and scalable voluntary carbon market can be a valuable tool to speed up the transition, to develop the Capital Markets Union and to complement the decarbonization effort.

Finally, a clear and consistent reporting framework is of the utmost importance. Right now, data and reporting are incomplete and heterogeneous, and it is impossible to identify, measure, compare, manage or to align what is not reported or disclosed. However, some important steps have already been taken to overcome the current alphabet soup, both in Europe (NFRD and EFRAG) and internationally (IFRS). The private sector is also making rapid progress to achieve some commonly accepted metrics. The World Economic Forum-International Business Council has proposed a comprehensive set covering four main pillars: governance, planet, people and prosperity.

Private sector companies must embed the whole ESG (Environmental, Social, Governance) dimension into their business strategy, internal processes and risk management to promote corporate sustainability on a long term. Sustainability has become a ‘must’ instead of something desirable, and there’s no going back. The S and the G are lagging behind the E, but they will converge over time.

However, we cannot settle for this, as there is still a lot of work to be done. The current unique situation, with all the stakeholders joining their forces to be a part of the solution to beat the Covid-19, help people, and revamp the real economy and the financial system, offers us great opportunities to build a greener and a better future for Europe and the European society.

The question now is when and where do we start? As the White Rabbit in Alice in Wonderland says “We’re late, we’re late for a very important date”. Indeed, 2030 is tomorrow and 2050, the horizon for achieving the EU's climate neutrality target, is the day after tomorrow.