1. political guidelines
In December 2019 the President of the European Commission, Ursula von der Leyen, presented her political programme called “Green Deal”. The Green Deal aims to make Europe climate-neutral by 2050. So much for the political goal. It is interesting to note that this programme was also presented from the outset as a growth strategy – an aspect that is often lost in the ideologically-driven debate on the subject. The fact is, however, that the Green Deal is intended to achieve its goals through massive investment in areas such as energy supply, digitalisation, artificial intelligence, cybersecurity, the greening of transport and the ecological transformation of industry and agriculture. Overall, the Green Deal aims at a more efficient use of resources through the transition to a clean and cycle-oriented economy.

At the beginning of July 2020, the Commission invited proposals to be submitted under the so-called “Innovation Fund”. The fund is fed by revenues from the auctioning of emission allowances under the EU Emissions Trading Scheme. The Innovation Fund will support technologies in the fields of renewable energy, energy-intensive industries, energy storage and carbon capture, use and storage. It aims to provide financial incentives for companies to invest in low-carbon technology today. It also aims to make EU companies world leaders in technology. For the period 2020-2030, the Innovation Fund will provide more than €10 billion from the auctioning of allowances under the EU Emissions Trading Scheme.

Finally, this week the European Council agreed on the financing of the Green Deal within the EU budget, linking it to a reconstruction fund that will focus on transforming the economy towards digitisation and climate-friendliness – together they agreed on a volume of €1.8 trillion (1,800 billion). This means that the European Union has more financial resources available than ever before to achieve its political goals.

2. framework conditions in the financial sector
Also in December 2019, the European Parliament and the Council Presidency adopted a decision in principle on an EU-wide classification system – also known as taxonomy. This system is intended to provide companies and investors with a common terminology so that they can identify which economic activities can be considered environmentally sustainable from an EU perspective. The aim of the taxonomy is to shift private investment towards sustainable technologies and businesses in order to leverage the public money with private capital, as set out in the European Commission’s plan.

This future framework is based on six EU environmental policy objectives:

  • climate change,
  • adaptation to climate change,
  • sustainable use and protection of water and marine resources,
  • Transition to a circular economy,
  • prevention and reduction of pollution, and
  • Protection and restoration of biodiversity and ecosystems.

To be considered environmentally sustainable, economic activities must meet the following requirements:

  • Make a significant contribution to at least one of the six environmental objectives listed above,
  • no significant impairment of one of the environmental objectives,
  • Implementation in compliance with minimum social standards,
  • compliance with specific technical evaluation criteria.

So far, the taxonomy has not yet been defined (this is to be done by the end of 2020) and is initially aimed at interested investors and companies. However, it is worth noting that the financial industry has been and is involved in the definition process of the criteria. There is consensus on the objectives of the taxonomy.

In our opinion, it can be clearly assumed that the currently non-binding recommendations will become binding in the medium term. Only a few days ago, the FMA presented its “translation” of the taxonomy into national guidelines and stated: “The FMA’s guidelines address cross-sectoral banks, insurance companies, asset managers, pension and occupational pension funds. They all have to include sustainability risks in the existing risk categories, in strategy and corporate governance, and as far as possible in the existing transparency obligations”. It is probably not very difficult to derive from these “recommendations” a commitment for the undertakings concerned, at the latest when confronted with best practices in the context of an FMA audit.

If the financial industry as a whole has to take sustainability risks into account in its strategy and risk management, it is probably also obvious that the customers of the financial sector, i.e. industrial or commercial enterprises, will also have to address these issues relatively soon. And it is not far from a mere statement to incentives to continuously improve the way sustainability risks are handled. Either in order to comply with appropriate legal requirements at some point in the future or – presumably relatively soon – to gain more favourable access to capital.

In this respect, we assume that the influence of this taxonomy will have a considerable impact on the European financial and economic system.

3. implementation at the operational level
What can we derive from these (economic) policy announcements, despite all the uncertainties that the implementation of such grand plans at European level usually brings? It is obvious that there is a strong political interest – largely supported by the will of the European population – to make massive efforts to transform Europe into a model region for a climate-neutral, sustainable economy. To achieve this political goal, the European Union – after all, the largest economic area in the world – is putting hundreds of billions of euros into action in a tremendous show of strength and creating a legal framework that will affect all companies in the medium term.

Nevertheless, the discussion about measures in the areas of climate and environmental protection is still often lost in ideologically motivated skirmishes. On the one hand, “naive eco-fundis”, on the other hand “retrograde climate change deniers” – I hope you will forgive me for the unobjective exaggeration – cloud our view of the facts. These facts are that we are observing developments that will have massive effects on almost all areas of our economy and society. From our point of view, regardless of ideological preference or rejection, it is essential for entrepreneurs and investors to take a close look at the opportunities that such a change in our economic activities will bring.

In view of ecological challenges and questions from powerful stakeholders, sustainability must be on the agenda of every CEO these days anyway. As natural resources worldwide become increasingly scarce, their prices will inevitably rise. For companies, therefore, measures in more “green” do not mean more costs, but rather less. In the future, sustainably successful companies will measure their ecological footprint throughout their entire value chain, reduce their use of operating resources and thus find new ways to reduce costs and innovate. These companies already exist – especially in our home markets of Switzerland, Austria and Germany: they operate solar and wind power, develop batteries, renovate buildings, work on more efficient production processes or expand the recycling industry. Of course, this list does not end here, because there are thought leaders in all areas. At FINAD, we therefore try to identify such companies in liquid and illiquid investments for our clients and grow together with them. After all, the development is global, not European. A strong market position in Europe could therefore very soon be the springboard to a strong global position.

We are convinced that in the future more and more capital will be invested in areas where there is more than just financial return, namely also positive effects on the environment or our society. This sustainable investment has been gaining in importance for years, both in politics and on the market, and will therefore lead to a paradigm shift in our financial and economic system in the near future. It should be noted that this does not mean that the social and environmental expectations mentioned above are replacing financial returns as the basis for investment decisions, but their importance will continue to grow – not least in the assessment of possible risks of investments.

You don’t have to be an ecological fundamentalist to welcome this development: after all, the popular buzzwords of impact investing, ESG criteria and “green” investments really only describe a return to sustainable entrepreneurship that is long-term oriented, invests in future opportunities and is not indifferent to the social environment. In this respect, we see current developments in Europe as an outstanding opportunity for our generation and an exciting opportunity for companies and investors to create a good long-term position for themselves.

By Dr. Dominik Lamezan-Salins