The European Commission has a fresh look and several new challenges. With the UK locked in post-Brexit transition talks with the EU, and with climate change and the global Covid-19 crisis an overriding consideration, the new president Ursula von der Leyen – who was elected in July 2019 and took up her post at the end of the year – holds the reins at a pivotal moment.  

There is plenty for CISI members working across Europe to take on board. Von der Leyen's pre-Covid-19 manifesto promises a marked shift in focus from the Commission's two previous policy cycles, where the key driver was a response to the 2008 financial crisis. One of the first acts of the previous Juncker Commission was to centralise "existing expertise and responsibility" in a new directorate, covering "financial stability, financial services and the capital markets union". The rationale was to "ensure the Commission remains active and vigilant in implementing the new supervisory and resolution rules for banks". The presidency of von der Leyen's predecessor Jean-Claude Juncker, from 2014 to 2019, was generally a good one for investors. The blue-chip Euro Stoxx 50 index of 'supersector leaders' in the eurozone rose from an average of 3,013 in December 2013 to an average of 3,715 in December 2019.

Under von der Leyen, the themes of sustainability and global competitiveness were set to take centre stage, although the Covid-19 pandemic has necessitated a revision of priorities as Europe seeks to weather the storm. An overview of the Commission's response indicates that it is "working on all fronts to contain the spread of the coronavirus, support national health systems, protect and save lives, and counter the socio-economic impacts of the pandemic".
Under Von der Leyen, the themes of sustainability and global competitiveness were set to take centre stage

In an emotive speech to the European Parliament on 16 April 2020, von der Leyen promises to "use every available euro we have – in every way we can – to save lives and protect livelihoods of Europeans." She also speaks of kick-starting economies and driving recovery "towards a more resilient, green and digital Europe", which includes "doubling down on our growth strategy by investing in the European Green Deal", making the point that "global warming will not slow down" as the "global recovery picks up".

Taxonomy and the Green Deal

The Green Deal has received a boost from the 'taxonomy agreement' thrashed out by EU member states in December 2019. This establishes a common classification system and rules laying out what is and is not an environmentally sustainable economic activity. The agreement says it "will enable investors to reorient their investments towards more sustainable technologies and businesses". On 9 March 2020, the technical expert group (TEG) on sustainable finance, which was set up in June 2018, published its final report on the taxonomy, outlining the TEG's final recommendations to the Commission. The recommendations cover the overall design of the taxonomy, as well as implementation guidance for financial firms and a technical annex that details updated technical screening criteria for climate change mitigation and adaptation activities.

All technologies covered by the taxonomy will be subject to the strict test of the 'do no significant harm' principle. Further development of the taxonomy will take place via a new Platform on Sustainable Finance, which is expected to launch in the autumn of 2020.

All technologies covered by the taxonomy will be subject to the strict test of the 'do no significant harm' principleAs Graham Bishop, a highly respected independent consultant on European integration, outlines, the taxonomy agreement may be a first step, but it is a hugely important one. It enables the Commission to progress its Green Deal because it defines terms. Is an investment green? "'Yes' or 'no' depends on the taxonomy – you build it up from there,"says Graham. He adds that the EU aims to make the Green Deal the gold standard on sustainability for others to follow. For instance, if a US company wants to issue bonds in Europe, it will need to certify that it is 'green' based on the EU criteria that the TEG on sustainable finance set out in its final report in March 2020.

The report insists that proceeds from EU green bonds should finance 'green projects' that contribute substantially to at least one of the six environmental objectives of the EU Taxonomy Regulation.

These objectives are: 

• climate change mitigation
• climate change adaptation
• sustainable use and protection of water and marine resources
• transition to a circular economy
• pollution prevention and control
• protection and restoration of biodiversity and ecosystems.

Europe is already a global leader in sustainable finance, as is reflected in its issuance of sustainable bonds. Figures cited in an AFME report published in October 2019 show that the EU issued 43% of global sustainable bonds in 2018 – significantly ahead of the US and China. The Commission aims to build on this as part of its overall commitment to the EU being climate neutral by 2050. 

The taxonomy agreement also allows initiatives such as the EU climate benchmarks to progress. The EU Climate Transition Benchmark and EU Paris-aligned Benchmark are designed to increase transparency on investors' impacts, specifically in relation to climate change and clean energy. Until now, no established framework has emerged for measuring the alignment of an investment portfolio with a temperature scenario. The EU climate benchmarks will only comprise companies that can demonstrate that they comply with a global temperature increase limit of 1.5°C.

Whether asset managers can fully report on their EU taxonomy aligned 'climate change' funds will depend on the transparency levels of the companies in which they invest. If they want to market their fund as a 'climate-focused' product they will have to report what percentage of their fund complies with the taxonomy. According to the European Commission: "Financial benchmarks have an important impact on investment flows. Many investors rely on them for creating investment products, measuring their performance and devising asset allocation strategies." This should provide an incentive for companies to comply.

Banking stability?

Referring to the Sustainable Europe Investment Plan in her manifesto, von der Leyen says: "Public finances alone will not be enough. We need to tap into private investment by putting green and sustainable financing at the heart of our investment chain and financial system."

The new Commission is openly encouraging green loans as well as bonds and is in the process of examining whether banks should be encouraged to fund sustainable sectors via a potential softening of the EU's rules on capital charges on their lending. The Commission taxonomy agreement from December sets out broad criteria for sustainable finance of all types, including climate change mitigation, pollution prevention and the protection of biodiversity and ecosystems.
The Commission taxonomy agreement from December sets out broad criteria for sustainable finance of all types

While rewarding investments into clean technologies can clearly be seen as encouraging responsible finance, the loosening of capital requirements has set alarm bells ringing in some quarters. José Manuel Campa, chair of the European Banking Authority (EBA), recently warned of the dangers of over-incentivising such lending by perceptibly easing capital requirements for banks. "What the EBA chair is saying is that you can't have a 'green' economy if the European banks become insolvent in the process," Graham explains. "That is the danger when you lend to people on incorrect risk weights."

The European Commission will remain focused on its 2050 climate neutrality target, but the stability of the banking sector comes into the equation if rules are softened and the onus for sustainable investing falls too heavily there. This is where the further development of capital markets could help as an alternative funding source. Safeguarding the stability of the banking sector in general is a challenge that has carried over from the previous Commission. The key piece in the banking union jigsaw remains the European Deposit Insurance Scheme (EDIS). If implemented, it would ensure citizens could be certain of the safety of their deposits up to €100,000, independent of their location.

The full article was originally published in the June 2020 flipbook edition of The Review. 

The full flipbook edition is now available online. 

All CISI members, excluding student members, are eligible to receive a hard copy of the quarterly print edition of the magazine. Members can opt in to receive the print edition by logging in to MyCISI, clicking on My account, then clicking the Communications tab and selecting 'Yes'.

Once you have read the flipbook edition, keep coming back to the digital edition of The Review, which is updated regularly with news, features and comment about the Institute and the financial services sector.