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Capital Markets Union


Towards a Sustainable Capital Markets Union

The European Commission’s Capital Markets Union initiative is an important step forward in the quest for growth in Europe. It aims to create new ways to better connect savers and investors with opportunities to finance the real economy.

But it comes at a time when a growing number of investors are increasingly aware that current business models and wider economic activity that assume unlimited natural resources are not sustainable, and are creating systemic risks. The lack of a robust risk-management framework to manage climate and wider environmental social and governance (ESG) risks within frameworks for financial regulation has been brought into sharp focus by the recent VW emission tests scandal.

Some governments are already moving. In the UK the Governor of the Bank of England has set out his concerns about the threat climate change-related risk poses to financial stability. In response to the Bank of England’s report the UK Government has agreed to set up an internal task force to look at taking the Bank’s findings forward. In France mandatory disclosure requirements have been introduced for investors as part of the new Law for the Energy Transition and Green Growth. 

The Financial Stability Board will in November report to G20 the findings of its probe into the potential risks posed by climate change to financial stability. The China G20 Presidency is expected to take this work forward in 2016. Most probable next steps will be to include better quality and more consistent disclosure on risk factors. This will need international coordination. Also likely will be requirements to stress test the resilience of both business models and investments to environmental exposures.

As such there is a strong case for the European Commission to consider as a key priority how the Capital Markets Union can deliver a framework that enables investors to identify, price and manage climate and wider ESG risks. There is also a need to ensure that the reforms that emerge from the Capital Markets Union can effectively facilitate investment in the infrastructure and supply chains needed to deliver a low carbon economy.

E3G is working with forward-thinking investors and with NGOs to embed sustainability as a core outcome of the Capital Markets Union – and work to facilitate the shifting of private capital to support low carbon and sustainable European economy.

We think three complementary approaches will be needed:

  • Greater disclosure both by companies and investors to facilitate a shift toward mainstreaming responsible investment practices;
  • Facilitating new approaches to investment through the Capital Markets Union; and
  • Effective risk management frameworks for infrastructure, some of which will need to be developed outside of the Capital Markets Union initiative.

 

This project has received funding from the European Commission through a LIFE grant. The content of this section reflects only the author's view. The Commission is not responsible for any use that may be made of the information it contains.



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