Changes for climate

Plan to finance sustainable economic growth

In March 2018 the European Commission published the EC Action Plan on Financing Sustainable Growth which had been developed by the High-Level Expert Group on Sustainable Finance (HLEG). The group included representatives of the banking sector, insurers, asset management companies, pension funds, stock exchanges, academia and NGOs. The experts identified three main objectives of the plan:

• Reorient capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth;
  
• Manage financial risks stemming from climate change, environmental degradation and social issues;
  
• Foster transparency and long-termism in financial and economic activity to support sustainability.
  

As part of the proposed plan, the Expert Group also formulated eight key recommendations which should be fundamental elements of a sustainable European financial system. These included a proposal of a unified EU classification system - Taxonomy - to provide clarity on which activities can be considered 'sustainable', creation of a voluntary EU-wide labelling scheme for sustainable financial products and a standard for green bonds, as well as recommendations for financial institutions and companies to disclose how sustainable development is taken into account in their decision-making. In response to the recommendations of the High Level Expert Group, on 11 December 2019 the European Commission presented the European Green Deal.

Economic sustainability

The European Green Deal announced by the European Commission is a strategic action plan incorporating sustainable development goals. It is linked with the implementation of the United Nation’s Agenda 2030. The Green Deal sets an ambitious task of shaping the EU policy in such a way so as to combine sustainability with the prosperity of society. Adopting the European Green Deal will require rethinking, among other things, the ways in which economic projects are financed, energy policy, policies for clean energy supply across the economy, production and consumption, large-scale infrastructure, transport, food and agriculture, building construction, taxation and social benefits. These issues need to be viewed in the context of protecting and restoring natural ecosystems, sustainable use of resources, and improving human health.

The European Commission has identified eight action areas under the Green Deal:

1. Pursuing climate neutrality

The European Commission plans to increase the EU’s greenhouse gas emission reductions targets. By 2030, emissions should be reduced by 50% compared with 1990 levels. To deliver these additional greenhouse gas emissions reductions, the Commission will, by June 2021, review all relevant climate-related policy instruments, including the Emissions Trading System (EU ETS). The Commission will also consider a possible extension of European Emissions Trading to new sectors and will review the regulations on land use, land use change and forestry. Furthermore, the Commission wants to introduce the Climate Law. These policy reforms are aimed to help ensure effective carbon pricing throughout the economy. The European Commission is aware that such a policy may lead to an increase in prices of goods and services produced on the European market as compared to foreign ones. If such a risk materializes, the Commission will then introduce a specific carbon duty for imported products. This is bound to affect prices, but at the same time it will allow the carbon footprint to be taken into account in the production chain.

2. Supplying clean and affordable energy

Another initiative to protect the climate is the decarbonising of the energy system. Energy efficiency must be prioritised, with a focus on renewable energy sources, the use of which will be critical to deliver the required reduction in CO2. The Commission stresses how important it is to ensure that the European energy market is integrated, interconnected and digitalised, and to increase offshore wind energy production. Its plans also include development of financing schemes to improve the thermal parameters of buildings and programmes addressing the issue of energy poverty.

3. Mobilising industry for a clean and circular economy

Achieving a climate neutral and circular economy requires the full mobilisation of European industry. The European Commission believes that it takes 25 years to transform an industrial sector and all the value chains. Hence, to be ready in 2050, decisions and actions need to be taken in the next five years. This period should be seen as an opportunity to transition to a sustainable model of inclusive growth. The circular economy action plan will include a ‘sustainable products’ policy to motivate producers to create goods with a longer service life. The Commission will analyse the need for a ‘right to repair’, and curb the built-in obsolescence of devices. The European Commission recognises the active role of consumers in shaping sustainable consumption, and focuses on education and access to information. Companies making ‘green claims’ should substantiate these against a standard methodology to assess their impact on the environment. A sustainable product policy also has the potential to reduce waste and the materials used in the production process will come from both primary and secondary sources.

4. Building and renovating in an energy and resource efficient way

The construction, use and renovation of buildings require significant amounts of energy and mineral resources. Buildings also account for 40% of energy consumed in EU. Today the annual renovation rate of the building stock varies from 0.4 to 1.2% in the Member States. This rate will need at least to double to reach the EU’s energy efficiency and climate objectives (climate neutrality) by 2050. To address this challenge and to improve the thermal parameters of buildings (which should by implication, reduce the energy consumption), the Commission wants to engage in a ‘renovation wave’ of public and private buildings. This will start with an assessment in 2020 of Member States’ national long-term renovation strategies. The Commission will also launch work on the possibility of including emissions from buildings in European emissions trading. In parallel, the Commission proposes a new initiative that will bring together the buildings and construction sector, architects and engineers and local authorities to design optimal solutions applicable to different regions.

5. Shift to sustainable and smart mobility

Transport accounts for 25% of the EU’s greenhouse gas emissions. To achieve climate neutrality, a 90% reduction in transport emissions is needed by 2050. Seen from this perspective, it may prove necessary to interfere with the use of different modes of transport. The Commission is committed to improving multimodal transport and shifting a significant part of transport from road to rail and inland waterways. The price of transport must reflect the impact it has on the environment and on health - hence, the potential reduction of the EU Emissions Trading System allowances allocated for free to airlines. The European Commission also plans to examine road user charging methods in the EU. By 2025, about 1 million public recharging and refuelling stations will be needed for the 13 million zero- and low-emission vehicles expected on European roads. In order to reduce the amount of greenhouse gases emitted in car exhaust, the Commission intends to review the legislation on CO2 emission performance standards. It will also consider applying EU ETS to road transport.

6. Fair, healthy and environmentally-friendly food system

With the new Farm to Fork programme, the European Commission wants the European agricultural products to become the global standard for sustainability. European farmers and fishermen have a key role to play in this process. The Farm to Fork Strategy will strengthen their efforts to tackle climate change, protect the environment and preserve biodiversity while ensuring that EU citizens have access to healthy food. The implementation mechanism is intended to shift the emphasis from compliance with new regulations to rewarding appropriate practices & performance. This should lead to the use of sustainable practices, such as precision agriculture, organic farming, agro-ecology, agro-forestry, responsible soil fertilisation, avoidance of chemical pesticides and fertilisers, reduction of the use of antibiotics and stricter animal welfare standards. The Farm to Fork Strategy will also contribute to achieving a circular economy by influencing the food processing and transport chain (reduction of packaging, reduction of storage time, minimisation of losses and production waste).

7. Preserving and restoring ecosystems and biodiversity

Ecosystems provide essential resources. Research shows worldwide erosion of biodiversity, caused primarily by changes in how land and sea are used, direct exploitation of natural resources and climate change. The European Commission intends to revise the Biodiversity Strategy to include measurable objectives that address the main causes of biodiversity loss. Among other things, it plans to increase the coverage of protected biodiversity-rich areas building on the Natura 2000 network. Member States can be put under an obligation to take action to restore damaged ecosystems. The EU also wants to increase the quality and quantity of EU’s forested areas - this objective fits in with the climate neutrality goals. The European ecosystem preservation strategy must include resilient seas and oceans, as their role in regulating the climate is considered to be significant. The sector can contribute by promoting the production and use of new sources of protein that can relieve pressure on agricultural land. The European Commission will also take a zero-tolerance approach to illegal, unreported and unregulated fishing.

8. Zero-pollution and toxic-free environment

The Commission plans to adopt in 2021 a zero-pollution action plan for air, water and soil. To achieve this, Member States will need to review all their policies and regulations. The aim is to restore the natural functions of ground and surface water. In addition, the Commission will review EU measures to address pollution from large industrial installations and it will work with Member States to develop a plan to improve the prevention of industrial accidents. To ensure a toxic-free environment, the European Commission will present a chemicals strategy for sustainability which will help protect citizens and the environment against hazardous chemicals and encourage innovation for the development of safe and sustainable alternatives. One way to achieve the above is to introduce a harmonised mechanism for assessing chemicals.

An investment plan for European Green Deal and Just Transition Mechanism

Achieving the European Green Deal will require significant investment. The European Commission has estimated that achieving the current 2030 climate and energy targets will require €260 billion of additional annual investment, which represents about 1.8% of EU GDP. The Commission has therefore prepared an Investment Plan for the European Green Deal and Just Transition Mechanism. The Plan relies on three pillars: funding, facilitation and practical support. In terms of funding, the Commission wants to generate sustainable investment of at least €1 trillion over the next decade. The European Investment Bank and private funds will be key support in this respect. 25% of the investments needed will be financed from the EU budget. The pillar of facilitation will be to build in incentives for public authorities to spend on sustainable development. The Commission will also propose the Just Transition Mechanism to help the regions most affected by the European Green Deal agenda. Such regions include those where many jobs depend on fossil fuels or carbon-intensive processes. Financial support will be linked to transforming the local economy towards low-carbon activities by providing support for retraining workers. The mechanism will come in addition to the currently available programmes, namely the European Regional Development Fund and the European Social Fund Plus. The practical assistance pillar will consist in supporting public authorities and sustainable developers in planning and implementing projects.

The role of private and public sectors

The private sector will play a key role in financing the European Green Deal. In January 2020, the Commission presented a sustainable financing strategy focusing on three main aspects.

The first one is to strengthen the foundations for sustainable investment. This will require notably that the European Parliament and Council adopt a Regulation establishing a framework to facilitate sustainable investment. The Regulation will provide guidance on the definition and classification of environmentally sustainable business activities (the so-called "Taxonomy") in order to determine the degree of environmental sustainability of investments. Companies and financial institutions will need to increase their disclosure of information on their activities affecting the climate and the environment. In order to maintain regulatory consistency, by 11 June this year, the Commission will also have revised Directive 2014/95/EU of the European Parliament and of the Council on the disclosure of non-financial data and information on diversity.

The second aspect is to increase transparency and eliminate asymmetry of information on the market, and thus make it easier for investors to invest in sustainable projects. This will be achieved through clear labels for retail investment products and developing a EU green bond standard.

The third pillar is the integration of climate and environmental risk into the functioning of the financial system through the adoption of the Regulation of the European Parliament and the Council on the disclosure of information related to sustainable development in the financial services sector. The Regulation is aimed to enhance the protection of end-investors and clients by providing a coherent framework for the disclosure of ESG risks by asset managers and financial advisors.

At the national level, the European Green Deal will create the context for broad-based tax reforms, removing subsidies for fossil fuels, shifting the tax burden from labour to pollution, and taking into account social considerations. VAT rates should also account for sustainable development and climate protection objectives. More funds will be spent on research to develop new technologies. The implementation of the Green Deal will require the use of digital infrastructure and AI solutions to facilitate decision-making on climate issues. The European Commission stresses that all legislation implemented in the EU should support and promote a sustainable future.

European Green Deal and Coronavirus

The European Green Deal is only just beginning to take shape, and the issues discussed in the European Commission’s document need to be described in greater detail. The current plans entail significant interference in the European economy and will require mobilisation within the financial and political spheres. The European Commission indicates that the entire legislation adopted in the EU should support the idea of sustainable development. The COVID-19 pandemic has put the economy on hold, but the ensuing crisis is an opportunity to use the potential of the European Green Deal. The countries of Central and Eastern Europe are therefore facing major challenges, as they will be able to transform their economies to support climate protection and pollution reduction with the funds obtained for investment purposes.

Author:
Michał Bieńkowski, Senior Consultant, Sustainability Consulting Team
Rafał Rudzki, Partner Associate, Sustainability Consulting Team