The ABBL perspective on Sustainable Finance

ABBL Published 27.04.2018

The ABBL welcomes the recently published EU Action Plan on Sustainable Finance promoting a greener and cleaner economy. This initiative is part of the Capital Markets Union’s (CMU) efforts to connect finance with the specific needs of the European economy for the benefit of the planet and our society.

The dedicated ABBL’s Sustainable Finance Working Group has organized itself in order to contribute to the work done at European level as well as locally with relevant input on the key aspects of the Action Plan, notably the taxonomy, green bonds, indexes and metrics, and incentives.

Taxonomy

The ABBL is convinced a first step should be to accurately define the different forms that sustainable finance may take.  This would allow the taking of efficient, reliable and measurable investment decisions. Our association strongly advocates for EU taxonomy classifying which type of assets can be considered as sustainable and to develop European standards based on quantitative indicators. In addition, taxonomy should evolve over time, according to the principle that “what we consider sustainable today may not be considered sustainable tomorrow”.

Incentives

The ABBL encourages the European Commission to explore appropriate adjustment to the prudential framework (e.g. the Capital Requirements Directives and Regulation) in order to better align the risk incurred by green assets with their related capital and liquidity costs.

Such measures should address both the cost in regulatory capital, and the constraint of maintaining expensive long-term funding to finance infrastructure projects, that usually bear long-term maturities.

Two potential options:

  • Lowering capital requirements of green assets by means of a “green supporting factor”
  • Target brown assets with a “brown penalizing factor”, because the transition risks will at some point materialize

Mainstream

Our association will support our members in mainstreaming sustainable finance, as follows:

  • Increase familiarity among specialist and many non-specialist audiences (i.e. via conferences in Luxembourg and abroad, the “Woch vun de Suen“, round table discussions, ABBL meets members, …)
  • Dedicated working group aiming at:
    • Establishing a platform to share views and opinions
    • Promotion: raising awareness
    • Education: providing training courses
  • Concepts and practices to be definitively adopted by all parties involved in the investment chain in a wide range of different markets and across the entire financial system;
  • Outcomes: being able to measure outcomes (i.e. effectiveness), impacts and sustainability of a project: were the set objectives achieved? How can results be improved in the future?

Ecosystem

Combining all the professional expertise and experience present in the Luxembourg financial center.

  • Build, develop and capitalize on the achievements already made at the national level:
    • Strengthen strategic public-private partnerships
    • Promote the role of the Luxembourg Stock Exchange (Lux Green Exchange)
    • Promote the role of LuxFlag (international and independent branding agency)
    • Support the development of the Luxembourg Sustainable Development Finance Platform (LSDFP), a public-private platform linking investors and sustainable projects both in Luxembourg and abroad
    • Promote the program Socially Responsible Enterprise of the INDR
  • Ensure a more efficient cooperation between Ministries as sustainable finance affects all main sectors (i.e. energy, finance, education…)
  • Strengthen the ongoing dialogue between the financial sector and policymakers to develop an adequate regulatory framework for the development of sustainable finance

Finally, sustainable finance is inseparably linked to TIME (Taxonomy, Incentives, Mainstream, Ecosystem): for finance to be sustainable, it must be trusted. And trust is clearly one of the most important requirements of long-term viability of the financial sector also to create certainty among market participants.

It’s all about actions and initiatives with a long-term orientation: investments in education, renewable energy, climate change mitigation, innovation, housing, infrastructure, all require long-term horizon, often over several years if not decades.

The success of sustainable development strategies is not in the separation of the two concepts of short and long-term strategies but it relies in a continuity and synergy between the two.

 

Source: European Commission

By Fabio Mandorino, ABBL Adviser – Commercial Banking / Private Banking / Sustainable Finance

 


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