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Delivering a Green Capital Markets Union

How can the EU’s ambitious ‘CMU’ integrate sustainability?

Sweden is taking the lead in the push to green the finance system at the EU level, both in terms of carbon pricing and low-carbon investment – as shown by its green bond plans. At a seminar in Brussels on October 17, titled: “Delivering a Green Capital Markets Union”, Per Bolund, the country’s Minister for Financial Markets and Consumer Affairs, said it was seeking to correct the current low carbon price in the EU ETS system, and finance more green infrastructure via wholesale changes to its economy.

At the seminar, organised by Bruegel, a European economic think tank, speakers discussed the greening of the EU’s Capital Markets Union (CMU) plans, as a way to counter the growing threat of climate change to financial stability. CMU aims to better connect savings to investment and broaden financing options for retail and institutional investors across the EU.

On the same day, Isabella Lovin, Sweden’s climate minister, told Reuters that Sweden had proposed several measures to the EU seeking to end the glut of carbon trading permits in the market. These include tightening the Market Stability Reserve (MSR) to remove some surplus allowances, scrapping permits above a set ceiling and the possible introduction of an expiration date to cancel surplus permits after five years.

Lovin said: “The ETS system is not working now and we don’t see that the (European) Commission’s proposal is sufficient in making sure that the price signal is strengthened.”

At the conference, Bolund said Sweden aims to be one of the first fossil fuel free nations in the world. He highlighted that, despite Sweden having the highest carbon tax in the world, its economic growth still ranked at number 6. Rather than a feared negative impact from a carbon tax, he said, Sweden had instead become an innovative supporter of the green economic transition as a result.

Bolund said the EU’s Capital Markets Union project could play a similar, vital role in the greening of capital markets more broadly. To get a transformation to a low carbon economy under way, he said, the disclosure of carbon emissions and carbon stress tests were needed. He suggested that the work on carbon reporting of the Financial Stability Board’s (FSB) Taskforce on Climate Related Financial Disclosure (TCFD) could be applied to the CMU to achieve this. Bolund said that the banking sector and its project finance lending operations to carbon intensive projects also needed to be reformed.Philippe Zaouati, CEO of Mirova, the responsible investment subsidiary of Natixis Asset Management, one of the speakers, quoted five challenges that the Green Finance Study Group work for the recent G20 summit in China, had identified to build a Green Capital Markets Union. He said pricing companies correctly when integrating their externalities was one. Others, he said, included the difficulty to understand and quantify market risks as well as the financing of assets with long-term maturities.

Altogether, he called for a balanced push and pull of instruments to incite a Green Capital Markets Union. Fundamental to this, he said, was standardizing definitions for ‘green’ assets and related financial/environmental disclosure. The right framework for a cost-effective green economic transition, he said, would require a mix of incentives including tax breaks, public intervention and the right amount of regulation, notably via intervention to compensate for market failures.

Tatiana Bosteels, Director Responsibility & Head, Responsible Property Investment, at Hermes Investment Management, said a starting point for a green Capital Markets Union was the integration of ESG in pension fund investment by applying fiduciary duty holistically, namely an understanding that retirees would be redeemed not only by pensions money but with a return in terms of the “quality of life” they retire into.

Michelle Kosmidis, Team Leader Financial Services Policy and International Affairs & Green Finance Lead at the European Commission, said the Commission was committed to sustainable finance, one example being the upcoming application of the EU Non-Financial Reporting Directive for large companies. However, she noted that ESG was often understood in different ways by various groups and that discussion on sustainable finance usually deflected to questions on the environment. A recently set up expert group, she said, would report by the end of this month or during November on how integrating ESG into the Capital Markets Union project could look.

RI has already reported that the expert group will develop a “comprehensive European strategy on sustainable finance”, that will support investment in green technologies and ‘ensure’ that the financial system can finance sustainable growth. Link