While AFME agrees with the European Commission that Covid-19 has reiterated the need to strengthen the sustainability and resilience of the economy with increased investment in this area, the Paris Agreement does not provide a satisfactory roadmap or clear milestones that must be achieved before reaching the end goal of net zero carbon emissions by 2050.

An EU-wide trajectory for transition with milestones is required “to find the right balance between the transition ambition and the capacity of the economy to undertake this transition.” Penalising financial institutions that are on their journey to transition but continue to invest in or lend to high carbon emitting sectors is not the right course of action, according to the AFME.

“In view of this, whilst we fully support a framework improving reporting and disclosure around carbon intensive sectors, including those that cannot change their business models, we think that creating a detailed “brown” taxonomy would be premature and might have unintended negative consequences discouraging investments in those sectors/activities, ultimately hampering the needed transition.”

AFME believes that providing banks with the necessary toolkit, such as standardisation of ESG data collection, harmonised reporting standards and consistent methodologies used by ESG ratings agencies would support this transition. In addition to this, cooperation between the private and public sectors would stimulate the creation of incentivisation mechanisms for both borrowers (investees) and finance providers (investors) to shift to sustainable finance models.

In a FinextraTV interview, AFME’s associate director of policy Tonia Plakhotniuk highlights that banks and capital markets firms have a crucial role to play in helping the economy transition and achieve low carbon and sustainable goals.

“It all started primarily with the EU action plan on financing sustainable growth back in 2018, which revealed a set of legislative and non-legislative measures to help the economy to transition. It was followed by the release of the European Green Deal in December 2019 and essentially, what the action plan and European Green Deal are saying is that massive investments will be needed both on the public and private side to help the economy change towards the 2050 decarbonisation targets [and remain] consistent with the Paris Agreement,” Plakhotniuk says.

On the subject of providing financial institutions with tools and incentives, Plakhotniuk states that banks in particular have a critical role to play as “the blood vessels channelling finance and capital to where it’s needed, and clearly now it’s needed in the direction towards sustainability.” She continues to say that a holistic approach is required, where all stakeholders - from the public and private sectors - can collaborate to achieve a strategy that benefits all parties.

However, the longstanding issue of clarity persists: clarity on objectives and resources needs to be provided by government and bodies such as the European Commission. AFME managing director Rick Watson adds that banks do have an important role to play on the road to a solution, but they are not the only significant piece of the transition puzzle. Issuers and large corporations in non-financial sectors are also heavily involved and must also ensure that their incentives are aligned to the Commission’s overall green programme.

Watson believes that creating incentives “economically for issuers to want to issue financial instruments which buyers want to buy at the right prices, to create that motivation with the banks in the middle, either as lenders or as capital markets arrangers or traders or research providers to provide incentives for that mechanism to develop on its own as quickly as possible.”