News & Insights

Why the Financial Services sector & industry alike need to take notice of the EU’s most far reaching set of proposals since EMU

Characterised by some pundits as neither an exercise regime for the middle-aged nor a rather niche dating-app, ‘Fit for 55’ is the European Commission’s huge package of proposals to tackle climate change and energy use. 

This really matters – to anyone living or working in the EU, and to anyone trading or planning to trade within the EU. Taken as a whole, and enacted in full, these proposals would fundamentally change the way of life for all citizens and businesses across Europe (and many beyond). The proposals cover everything from energy, land use, transport to energy taxation policy. Under these proposals at least seven existing EU laws will be revised, and as many as five new areas of legislation enacted. 

This is the most far reaching set of proposals since EMU and the creation of the Euro in 1999;  the role of the financial services sector will be critical here as it was then. Yet at the moment many public affairs professionals, especially in financial services, have their focus elsewhere. With so much at stake and so little time available, businesses need to engage in the process now. 

The title ‘Fit for 55’ actually comes from the headline objective to reduce net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels; which is key to helping the EU realise its ambition to become the world’s first climate-neutral continent by 2050. The Commission’s proposals are now being worked on by MEPs and Council ministers. All sides say they want to reach agreement by summer next year, but the scale of change that is envisaged, the required government intervention and the increases in costs for individuals and businesses is unprecedented. 

Finding consensus will not be easy. Whole industries will have to transition to greener business models and greener value chains. The role of sustainable finance will be paramount.

Finance has sought to lead the way

In many ways the financial sector has been taking a lead. Hundreds of billions of euros have been raised for green investment in the past two years, and since 2018, the European Commission’s Financial Services Directorate (DG FISMA) has been working on an action plan to finance sustainable growth built around three key building blocks:

1. An agreed ‘EU Taxonomy’ – to say what counts as green
2. A comprehensive mandatory disclosure regime – to signal how green you are
3. A set of standards for Sustainable Finance instruments – to support a green market.

Conceptually the taxonomy is the link between Fit for 55 and sustainable finance. However, the taxonomy regulation, which entered into force in July last year, anticipated the actual goals for transition, meaning that in practice it might not be channelling finance in the right direction. One might say that DG FISMA’s enthusiasm to act early put the cart before the horse by defining green assets before the overall policy goals for the real economy had been determined.

Potential misalignment 

As the politicians and broader industry catch up with the scale of the task and speed of change required, all European economies and the EU’s neighboring economies face a significant challenge. 

Accepting the need for coordination with other Commission initiatives DG FISMA updated its strategy in July to include “transitioning activities”, and a report is expected by the end of the year to set out proposals for extending the scope of the taxonomy from defining what is green to defining what is “transitioning towards green”. A further report, on social taxonomy (the S of ESG), is expected by the end 2021. But, with both the revisions to the taxonomy and scrutiny of the Fit for 55 proposals moving in parallel, there will need to be more coordination and more conversations if the Commission’s green ambitions and the finance needed to fund these are to be successful. 

What does this mean for you? 

The good news is that EU policymakers recognise that their ambitions for climate change and for the green transition cannot succeed without huge growth in sustainable finance. There is an urgent need for discussion, debate and education, but the ambitious timeline attached to Fit for 55 means time is limited. Among other, critical clarifications must be made on:

• the core definitions of green and transitioning funds / products; 
• predictability with common international language and disclosure frameworks for investors, insurers, and lenders; 
• safeguards against ‘greenwashing’ ,’transitioning washing’ and false claims; 
• clear regulatory hierarchy and accountability

In addition to all that, an overarching challenge for both the real economy and the financial industry is that there is not much structural coordination between the “Fit for 55” package and DG FISMA’s Sustainable Finance Strategy.

The clock is ticking and too many financial services companies are sailing blind towards the deadline. At BOLDT we are helping companies to better understand and alleviate new policy risks as well as recognise new opportunities, by translating their issues into meaningful input to decision-makers across the EU’s institutions.

Interested in learning more? Please reach out to Raphaël Delli.