Executive summary
The proposals set out in this paper make the argument for specific tangible changes that financial institutions, financial regulators and policy makers can implement to deliver sustainable finance. They are clustered together in themes, each with their own briefing notes and recommendations to serve as building blocks in a renewed financial system.
The themes are, in broad terms, realigning finance with society’s needs; recalibrating regulatory instruments; making the financial ecosystem more diverse and collaborative; helping individual citizens to invest in a sustainable economy; encouraging financial firms to develop sustainable business models; and creating the disclosures needed to manage the sustainability of the financial system.
Collectively, these themes and recommendations reflect the thinking of some of the pioneering practitioners and leading thinkers on sustainable finance who contributed to this report – with a particular emphasis on the role of sustainable banking as a major driving force in a sustainable economy.
A summary of the proposals is as follows:
Realigning finance with society
Without a shared understanding of the purpose of finance – what it is really there for – there is little chance that the financial sector as a whole will be well aligned with society’s needs.
Sustainability assessments for assets
Encourage lenders to assess the real economy, public interest and sustainability aspects of each new exposure. Such a test could be designed in such a way to assess compliance with, for example, the Sustainable Development Goals (SDGs), or national economic transition plans.
Banks to formulate their purpose
Industry bodies to support their members to find and formulate their purpose in open dialogue with the public at large, with a view to formulating a purpose for themselves that is consistent with the SDGs and the mission 2020 agenda.
Recalibrating regulatory instruments to encourage real stability
Following from the argument in the previous section that finance needs to be realigned with society’s needs, there is a case for using financial regulation to ensure that the financial system takes account of its impacts and interdependencies with the economy, society and the environment. Measures might focus on capital requirements, liquidity rules, reporting requirements, guarantees, technical assistance, fiscal measures and levies.
Capital requirements with sustainability weightings
Recalibrate capital measures for banks to address systemic risks by introducing capital support factors for sustainable and public-interest assets which demonstrate compliance or progress towards the Sustainable Development Goals; and additional capital surcharges for assets with higher environmental and social risks and which do not comply with the Sustainable Development Goals.
Guarantees, subsidies and technical assistance
Introduce support mechanisms including public authority or EIB guarantees, fiscal measures (tax incentives for either savers/investors or institutions), and technical assistance grants in order to stimulate investment in emerging sectors within the sustainable economy which still carry the risks of an immature market.
Sustainability levy for financial assets
Create a levy mechanism to penalise or reward financial institutions for the sustainability outcomes (such as climate risk) of specific assets as an alternative to using capital weightings. Levies on unsustainable assets could fund market support for sustainable assets in a revenue neutral way.
A diverse financial ecosystem to grow a sustainable economy
A more diverse financial industry structure – in which financial institutions have different business models, investment horizons and risk appetites – is needed to meet the targets for the Paris Climate Agreement and Sustainable Development Goals. This means breaking down banking monocultures to foster a more diverse ecosystem of sustainable finance partners, and helping the financial community to get involved in projects at an earlier stage.
Increased financial sector diversity
Create a toolkit for European cities, regions and public authorities on how best to convene a diverse ecosystem of sustainable finance partners – including impact investors, public banks, commercial banks, values-based banks, philanthropic research/innovation funders, local banks/ credit unions, cooperatives and crowdfunding platforms together with mainstream finance and public finance institutions – to avoid the sector being dominated by one business model.
A European hub for sustainable investments
Create ‘Sustainable Infrastructure Europe’ as a centre of expertise and catalyst, where a diverse ecosystem of sustainable finance partners can co-develop projects, develop best practices and methodologies, share information about funding, and provide connections between similar projects.
Sustainable finance for all
Most people want to invest in a sustainable future. But when it comes to the choices available to individuals in Europe, the most direct and impactful investments are rendered inaccessible by regulation in almost all Member States. Some national initiatives to promote sustainable retail investing have worked well and could be replicated at EU level.
European Sustainability Funds for citizen investors
Create a new EU regulatory regime for sustainable investment funds available to ordinary citizens – opening these up for impact investment into long-term assets, based on expanding and generalizing some tried and tested models. A “UCISS” regime (Undertakings for Collective Investments in Sustainable Securities) could build on the success of UCITS (for transferable securities).
Sustainability – the reason why finance should make money
Being a leader in sustainability and an effective partner in new sustainable developments could be a major opportunity for value creation within the financial industry. This will need new competencies and channels of accountability at every level of the organisation, and transparency about the sustainability of financial firms’ activities.
Sustainability training for finance workers
European Banking Federation to work with national banking associations to promote sustainable leadership and to encourage the uptake of accredited sustainability training and competency programs in all financial institutions.
Managing what matters most
To make real progress towards sustainability means ensuring that there is genuine focus on the long-term social, environmental and economic issues that matter, and being genuinely transparent about progress.
Reporting on sustainability
Add sustainability metrics to financial institutions’ reporting, building on the French Article 173 approach to carbon emissions reporting, so that firms report on the proportion of the balance sheet that is SDG-compliant or not, alongside standard metrics such as profit and growth.
Loyalty Shares
Adopt a common recognition of ‘L-shares’, in which investors acquire additional benefits after holding a share for a number of years, across the EU, potentially with harmonised incentives, to tilt the balance towards loyal, long-term investors and enable companies to remain more focused on the long-term issues that matter most.
