The summer of 2021 brought a flurry of sustainable finance news, much of it related to climate policy in the European Union. We bring you a roundup of three key developments you may have missed while you were away.
EU sustainable finance: Renewed strategy for the race to zero
In July, the European Commission adopted a new package of measures on sustainable finance in order to spur interest in sustainable capital markets and further tackle greenwashing. The new strategy is based on the EU action plan on sustainable finance, first published in 2018, and consists of a set of six actions (see info box below).
The key building blocks of the strategy are:
- the Taxonomy
- the European Green Bond Standard (EUGBS) and
- the reporting directives CSRD (Corporate Sustainability Reporting Directive, formerly the Non-Financial Reporting Directive, or NFRD) for non-financial firms and SFDR (Sustainable Finance Disclosure Regulation) for financial firms.
The renewed strategy builds on the existing elements and extends its focus to transition financing activities and increased inclusion of small and mid-sized businesses (SMEs). Furthermore, it aims to increase investor participation in European green capital markets.
Reporting on the EU taxonomy’s first two environmental objectives, climate change mitigation and climate change adaption, will become mandatory for some companies, namely large financial and non-financial companies, in the beginning of 2022. The other four environmental objectives are currently under consultation with a call for feedback to the European Commission, as is the draft for the Social Taxonomy which is planned to go into force in the end of 2022.
Find out more in this detailed guide to the EU’s renewed strategy.
Six core actions of the Renewed Sustainable Finance Strategy
|Extend the existing sustainable finance toolbox to facilitate access to transition finance|
|Improve the inclusiveness of small and medium-sized enterprises (SMEs), and consumers, by giving them the right tools and incentives to access transition finance.|
|Enhance the resilience of the economic and financial system to sustainability risks|
|Increase the contribution of the financial sector to sustainability|
|Ensure the integrity of the EU financial system and monitor its orderly transition to sustainability|
|Develop international sustainable finance initiatives and standards, and support EU partner countries|
Source: European Commission
Carbon emissions: New ambitious targets under Fit for 55
The first half of the year has exposed the devastating direct and indirect impacts of climate change on assets and livelihoods. Against the background of flash-floods in Northern Europe, persistent global wildfires and severe droughts in the western United States, the EU published its proposal to revise the 2030 emission reduction target to 55% (up from 40% previously) under the Fit for 55 package. The long-term aim of the package is to support the EU target for carbon neutrality by 2050.
After the European Climate Law came into force in June, the European Commission presented the first part of its reform package on 14 July, with the next parts to be released later in 2021. The package encompasses more than a dozen measures, including a revision of the EU Emissions Trading System (ETS), the Carbon Border Adjustment Mechanism (CBAM) and the objectives for forestry and land use (LULUCF). Still outstanding is a revision of Energy Efficiency in Buildings as well as new guidelines on state aid concerning climate, environment and energy, which are expected in November 2021, leaving European companies in the forestry and real estate sector in limbo until then.
Breakdown of the Fit for 55 measures
|· Stronger Emissions Trading System including in aviation
· Extending Emissions Trading to maritime, road transport and buildings
· Updated Energy Taxation Directive
· New Carbon Border Adjustment Mechanism
|· Updated Effort Sharing Regulation
· Updated Land Use and Forestry Regulation
· Updated Renewable Energy Directive
· Updated Energy Efficiency Directive
|· Stricter CO2 performance for cars and vans
· New infrastructure for alternative fuels
· ReFuelEU: Sustainable aviation fuel initiative
· FuelEU: Clean maritime fuel initiative
|· Using revenues and regulations to promote innovation, build solidarity and mitigate impacts for the vulnerable, notably through the new Social Climate Fund and enhanced modernisation and innovation funds|
Sources: European Commission, Nordea
Global warming: A dire warning from the IPCC
The Intergovernmental Panel on Climate Change (IPCC), established in 1988, brings together the world’s leading climate change experts to prepare regular reports on the state of the global climate. The panel’s August report, drawing upon 14,000 studies, points towards dire developments in climate warming and highlights the urgency of pursuing zero emission targets. While the current report focused on a climate assessment, it is to be supplemented next year with insights on the impact of global warming and potential mitigation strategies.
The report is the IPCC’s most serious warning to date, with the panel concluding that even in the best-case scenario a major general climate change is inevitable. In all five scenarios set out, the +1.5C mark is exceeded. What’s more, many effects of warming, such as the melting of polar caps, are irreversible.
Despite this gloomy outlook, the panel concludes that there’s still an opportunity to limit negative impacts if immediate action is taken. The report is expected to inform policymakers ahead of November’s COP26 conference, where each member nation is expected to present a stringent plan for the reduction of greenhouse gases in line with the Paris Agreement.
To limit global warming, strong, rapid, and sustained reductions in CO2, methane, and other greenhouse gases are necessary. This would not only reduce the consequences of climate change but also improve air quality.
IPCC's Sixth Assessment Report
We expect that following COP26, the report will bring more rigorous emission reduction targets into focus, notably for CO2 and methane. This will most likely also be reflected in future legislation such as the EU Taxonomy and climate reporting initiatives such as the Science Based Targets.
Ebba Ramel, Sustainable Finance Advisory, Nordea
Lea Gamsjäger, Sustainable Finance Advisory, Nordea
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