A great EU export success: sustainable finance

When viewed from the perspective of a rapidly rising China, but also from that of the US superpower, the European Union is increasingly on the periphery of where the world’s economic dynamism can be seen: in Asia.

And on the basis of economic statistics, it is easy to conclude that the EU is rapidly losing ground on the world stage to China and the USA. But when you look at how small national companies and big international companies everywhere are dancing to the tune of the EU, the picture looks quite different.

Even vast American platforms and big-tech businesses such as Facebook, Google and Microsoft comply with the EU’s antitrust rules. It has been seen every time and everywhere that the strongest rules (i.e. the EU’s rules) are becoming the global norm.

The American Columbia Law School Professor Anu Bradford has spent the last eight years looking into the EU’s desired and undesired impact on the rest of the world. Her book, entitled The Brussels Effect (1), was published earlier this year. In the book, she describes how the EU punches above its (shrinking) economic weight by setting standards in a variety of areas for the whole world. For example, take the new Sustainable Finance rules currently coming from Brussels.

EU and Sustainable Finance
Sustainable finance is the EU’s answer to translating obligations from the Paris Agreement on Climate Change into rules for the financial markets. The EU rules are intended to help investors make informed investment decisions in the climate transition and create a level playing field. They were followed in 2018 by an action plan of legislative proposals.

Financial institutions in the EU, including Dutch pension funds and pension fund managers, are currently hard at work implementing the legislation and preparing themselves for compliance with the new EU taxonomy on sustainable finance.

The missing piece in the puzzle of the EU’s sustainable finance agenda remains the availability of companies’ data. Non-financial data from companies and projects is essential to making sustainable finance rules relevant to the investment decisions of pension funds. The Commission is going to make a proposal in the new year to make this data available.

To the US
On behalf of PGGM, I recently addressed a digital annual conference of the American alternative fund managers, on a panel of representatives from Harvard University, JP Morgan and Marshall Wace, and spoke about our involvement with this EU agenda as part of the Dutch pension sector. A clear picture emerged: people are expecting that following Joe Biden’s arrival, the European sustainable finance rules will come to the US too.

This soon led to questions about our experiences implementing the Sustainable Finance Disclosure Regulation (SFDR), what recommendations we would make for American fund managers to prepare themselves for the new reality and what we think is the greatest challenge as the sustainable finance agenda progresses further.

This was a great opportunity to emphasise the importance of having access to appropriate and comparable data. And this is where there is a role for regulators to set standards, but also for fund managers of all shapes and sizes to equip clients to steer themselves with non-financial data towards a climate-neutral portfolio.

Biden Agenda
The EU recently saw its global leadership in climate policy on the basis of the Paris Agreement translated into net zero commitments in Asia (China, Japan and South Korea) and in the UK. President Elect Biden has indicated he will bring the country back into the Paris Agreement and also work towards a net zero commitment for the US.

This makes a rapid transition towards a net zero economy an increasingly realistic prospect for investors, markets and businesses. The EU can be expected to strengthen its climate diplomacy in this new economic inevitability.

Biden’s climate plan contains a number of important components resembling the EU Green Deal, such as creating sector transition pathways with emissions targets, promoting renewable energy and emissions trade tariffs. The list also includes sustainable finance and use of the SFDR and taxonomy (2).

This creates a lot of scope for cooperation between the US and the EU. EU diplomats are talking about a potential ‘race to the top’. It remains to be seen how much clout a Biden presidency will have to get new legislation through the Senate.

Either way, the forthcoming international climate change conference in Glasgow and the G7 and G20 meetings next year, driven by the Covid crisis and the presence of a new American president, will look different, and the EU’s leadership on climate change may receive an extra boost. The agreement reached during the EU summit of December 11 on raising the 2030 emission reduction goals to ‘at least 55%’ relative to 1990, is exemplary.

Sources:
1. Anu Bradford, The Brussels Effect, 2020
2. EU Clean Economy Briefing 28/10/2020