EU green-bond plans face industry fears over constraints and project supply

Reconfiguring the global economy to tackle climate change is headline news as youth activists lecture world leaders on the need for “panic” and Democrat lawmakers in the US push for a “Green New Deal” in an echo of spending splurges of the 1930s.

The eventual breakthrough, however, may come from an unassuming EU proposal that would effectively require listed companies to disclose how exposed they are to the risk of climate change.

The planned legislation has a focus on the financial sector, but this could be a Trojan horse for the wider economy, as any company wanting to get onto the portfolio of a big investor would have to provide information about its climate footprint.

If it works, the proposal would leave private companies to do most of the economic heavy lifting in transforming Europe to a low-carbon economy.

But first it must avoid several pitfalls, from inconsistency to mission creep.

EU plans

The UN-backed Paris Agreement to limit global temperature increases requires trillions of dollars of investment in low-carbon technology, including from the private sector, the EU says.

At the same time, experts have warned that failure to account for climate shifts endangers the world’s financial stability. As Bank of England Governor Mark Carney reasoned in a 2016 speech, banks relying on fossil-fuel companies to pad out their balance sheets and insurers who haven’t catered for increased flooding risks will soon find holes in their books.

The EU’s plans for sustainable finance, set out last May and now open for consultation until March 20, aim to make markets more aware of these risks and create a new class of green loans and investments.

Previous EU green labelling initiatives have focused on more limited areas such as ensuring washing machines display their environmental credentials.

But the financial sector is different: It doesn’t exist in isolation. Asset managers and banks complain they can’t tell how green their balance sheets are unless the companies they invest in are equally transparent.

Hence the commission’s proposals, enabling investors to judge exposure to plastics, coal and other environmental no-nos.

The market exists, proponents say. Many long-term investors would welcome a signal that a company is a safe and sustainable bet. Better reporting would also help investors with goals that aren’t purely economic — like the Church of England pension fund, or the EU’s own European Investment Bank.

Pitfalls

The idea is not without its dangers, though.

Too inflexible, and it will look like governments are picking winners in a market moving faster than lawmakers can. Few predicted the green technology advances of recent years, and few can now judge where the next big breakthrough may come.

There are thorny technical issues, too. Purists hate the idea of giving any level of fossil-fuel exposure an EU badge of approval, but making an economy more sustainable often requires painful tradeoffs.

For instance, manufacturing glass is highly polluting, but fitting a building with double glazing is a smart environmental move. Electric cars have zero emissions at the tailpipe but produce a lot of carbon in their manufacture.

Likewise, even an investment portfolio that has holdings in fossil-fuel assets might, on balance, be green.

There’s also a risk of mission creep, with the plans extending to more politically contentious sustainability issues such as inequality.

Likewise, some see the EU project as an opportunity to change the role of finance in the economy. Sending market signals is one thing; fundamentally changing investors’ fiduciary duty to maximize returns is quite another.

Ahead of the curve

A key European Parliament committee vote on these issues is due shortly, while an EU technical expert group has until June to classify environmental sin, sector by sector.

With Donald Trump in the White House, and a grouping of the world’s 20 biggest economies chaired first by Japan, then Saudi Arabia, few expect coherent international action in the coming years.

Europe can’t wait that long, but hopes it might steal a march on a transition that it believes will prove inevitable.

It wouldn't be the first time. While the EU was developing its data-protection legislation, skeptics worried the continent’s obsession with online privacy would kill the Internet. Then the Cambridge Analytica scandal at Facebook showed they had been right to worry.

Many hope that green finance will repeat that pattern, underlining the EU’s role as the world’s regulatory superpower