'Brown' investments could face future penalties under EU 'green' finance initiative

18 June 2018 7:48am

6 June 2018. By John Rega.

The EU’s sustainable-finance initiative could one day include punishments as well as incentives to deter investors from environmental harm, a senior European Commission official has said.

The commission’s proposal now before lawmakers seeks only to define “green” investments such as wind farms or energy-saving buildings, and mandate financial companies to explain their investment policies regarding climate change and other such factors. Investors could then choose what strategy to pursue.

But the framework being created would also leave policymakers with the scope to offer regulatory breaks as pro-green incentives — the topic of a current debate — or even rules going the other way to penalize environmentally harmful “brown” investments, said Ugo Bassi, the commission's director of financial-market policy, at a conference* yesterday in Brussels.  

“We do not exclude, honestly, that the penalizing ‘brown’ element will come in in the future,” Bassi said during a panel discussion on ways that financial rules could spur environmental goals.

“We wanted to start with something we felt more comfortable with,” he said of the commission’s May 24 proposal. “This is the beginning of a long [road].”

The current legislative proposal simply creates a method by which an advisory group would work out definitions for various categories of environmentally beneficial investments, to prevent the “green-washing” of projects that do little to combat climate change. Social and governance factors could be introduced later.

Once these definitions are in place, the EU could seek to reduce capital requirements for banks and insurers to finance qualifying businesses, lowering the cost of funding. That would require separate legislation.

Any adjustment to prudential capital rules — designed to safeguard financial companies from collapse — should come only after more information is gathered on the risks, said Molly Scott Cato, a UK Green lawmaker who led the European Parliament to adopt a resolution on sustainable-finance last week.

“Politically I can’t make a decision … until I have a lot more information,” she said on the panel with Bassi.

Scott Cato added that a “green supporting factor” may not be in necessary in any case, as she said that buildings with top energy-use ratings already typically earn lower mortgage rates.

Banks agree on the need to support the green-finance agenda as a business imperative, said Christiane Muyldermans, regulatory counsel with KBC Groep in Brussels. “Sustainability today is no longer a 'nice to have,' but a 'need to be,' ” she said on the panel.

But lending is a fiduciary duty, Muyldermans argued, and shouldn’t be subject to tweaks in prudential rules. “We don’t support any factor — brown, black or green,” she said.

Fintech Regulation in 2018