The European Commission (EC) on Dec. 11 unveiled the ‘European Green Deal,’ an initial roadmap in a plan to make the region carbon-neutral by 2050.
The European Union’s (EU) executive body presented key policies and measures needed to meet emissions neutrality and listed the next legislative steps to be taken towards that goal. The document acts as a broad and ambitious guideline of work for coming years that will shape the way governments, businesses, consumers and investors will adjust to new climate objectives.
“Delivering additional reductions in emissions is a challenge,” the EC said in a press release. “It will require massive public investment and increased efforts to direct private capital towards climate and environmental action, while avoiding lock-in into unsustainable practices. The EU must be at the forefront of coordinating international efforts towards building a coherent financial system that supports sustainable solutions.”
The statement said that the private sector will be key to financing the green transition. The estimated funding gap to achieve existing 2030 climate and energy targets stands at 260 billion euros annually.
The EC said it will present a renewed finance strategy in 2020 to strengthen the foundations for sustainable investment and push for the integration of climate and environmental risks into the financial system. This includes a planned taxonomy for environmentally sustainable activities and the embedding and disclosure of ‘green’ metrics into the corporate governance framework.
Low carbon and climate indices
For investors, climate change has never been more relevant. Asset owners are rapidly taking tangible action to control their exposure to climate risks, which can arise in the form of weather disruption or regulatory constraints on business operations.
“Climate risk has become a serious consideration for portfolio managers, akin to political or economic factors,” said Willem Keogh, Head of ESG and Thematic Solutions at STOXX’s parent Qontigo. “The fight to limit emissions and combat climate change has become crucial, and high-carbon assets are increasingly seen as a liability.”
The EC has advanced in its agenda to develop a framework that encourages investments in sustainable finance. Last September, a technical expert group recommended a list of minimum technical requirements for a new generation of low-carbon benchmarks to tackle the risk of greenwashing. Two new categories of climate benchmarks are considered: a ‘EU Climate Transition Benchmark’ (CTB), and a ‘EU Paris-Aligned Benchmark’ (PAB) for investments in line with the 1.5-degree global-warming goal of the Paris Agreement.
The group also recommended a set of environmental, social and governance (ESG) disclosure requirements to enhance transparency and comparability across benchmarks.
STOXX will develop indices that meet both classifications and requirements, once final detailed regulation is published. STOXX has produced low-carbon indices since 2016 to help investors get a more accurate perspective on the environmental impacts of their portfolios.
A potential game-changer
The European Green Deal has the ambition to put the region ahead in the fight against climate change and environmental degradation, and will likely influence every aspect of development in the European Union. Its set of rules will also affect the value and risk of investments, making it highly critical for money managers and asset owners.
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