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The Green Deal aims to make Europe the first climate-neutral continent by 2050. It comes with a regulatory framework that will inevitably transform the financial sector. Mélanie Mortier, Senior Portfolio Manager at Banque de Luxembourg, reflects on the major challenges for sustainable finance in the December edition of Paperjam.

As part of the European Green Deal, the EU Commission is creating an action plan to promote more sustainable finance.

What is your view on this move to make Europe a model for sustainable investment?

Mélanie Mortier: The action plan is designed to support the climate targets set by the European Union. The EU will need around EUR 180 billion of additional investments every year to achieve the 2030 targets set at the Paris Climate Conference, including cutting greenhouse gas emissions by 40%. The Green Deal aims higher with a plan to make Europe the first climate-neutral continent by 2050. So, in response to recommendations from the High-Level Expert Group (HLEG) on Sustainable Finance, the Commission prepared a roadmap for a financial system to build an economy capable of generating growth while also promoting environmental and social goals.

The EU adopted a number of regulations a year ago in December 2019, including an EU taxonomy. Where are we today? Are we moving in the right direction?

Mélanie Mortier: The EU taxonomy creates a structural framework, introducing an EU-wide classification system providing investors and companies with a common language for assessing which economic activities can be considered environmentally sustainable. This framework aims to facilitate sustainable investments, and it should also make it easier to compare sustainable financial products. But, we regret that social and governance aspects are not (yet) included.

The EU Taxonomy Regulation focuses on six environmental objectives and leaves aside other aspects normally found in ESG investments. The main pitfall in my opinion is the binary nature of the list of economic activities in the Regulation. Either your activity is included, or it isn’t. Therefore there are grey areas. What are the financing prospects for companies that fall outside the EU-wide taxonomy in the future? The risk is that listed activities might attract all of the available funding, despite not being very sound economically, to the detriment of other more stable companies in the process of transition to a greener model. This is why it's important not to forget the social and governance aspects.

What are the other challenges facing this European action plan?

Mélanie Mortier: The biggest challenge for the banking world is undoubtedly the level of transparency required regarding the sustainability of investment products. Client information will have to contain much greater detail on sustainability. The challenge is to provide useful, understandable and relevant information, and avoid overwhelming the end investor with a pile of disparate data. Our role will be to educate investors, who read a lot, are eager for clear information but who, we must admit, are sometimes a little lost in today’s data jungle. This reform and the creation of standards should help establish a better structure in the financial sector as it evolves. The focus on transparency is also a weapon to tackle greenwashing.

Is the public aware of this development? Is there demand for this type of investment that contributes to climate protection?

Mélanie Mortier: It's true that some clients have yet to get the measure of all the options available to them, but we receive an increasing number of questions about sustainable and responsible investing. What's more, the trend in these turbulent times since February/March 2020 is for an outflow of funds from classic investment funds across Europe and an inflow to ESG funds. The demand is there – and growing.

At the other end of the chain, how should potential investors select companies to invest in?

Mélanie Mortier: This topic is not new to Banque de Luxembourg. We are long-term investors: our research takes in all aspects of a company to measure overall risk, which of course includes ESG risks. We focus on high-quality companies with a competitive advantage. The European action plan will accelerate rather than change this process. It implies a more structured approach and emphasises the level of transparency required vis-à-vis the end investor.

You can find the full interview (in french) in the Luxembourg economic and financial magazine "Paperjam” in Tax & Legal section of the December edition.

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