We need mandatory due diligence on investments, says EU rapporteur

Prior to the Paris Agreement the political action on climate focused on sapping the energy out of energy-intensive industries. Now the focus is shifting to the money that funds these industries – including money that will eventually pay for our pensions.

To tackle climate change, we must have the power to move our money in the direction of sustainability. This is the fundamental ambition of the new European agenda for sustainable finance.

The EU Commission recently launched an action plan on sustainable finance and organised a high-level conference with French President Emmanuel Macron as guest speaker, who is positioning himself as a global leader on this agenda.

I was delighted to be chosen as the European Parliament’s rapporteur for our own report on sustainable finance, which received overwhelming support from MEPs when voted on in the European Parliament.

Due diligence

My report calls on investors to carry out mandatory due diligence so investors are clear on the impact of their investments on environmental, social and governance (ESG) factors and how they affect human lives around the world.

The commitment shown by the Commission in tackling the vital question of shifting finance away from carbon-intensive sectors is very welcome, although calling the conference ‘Financing Sustainable Growth’ made some assumptions about the dynamic of a sustainable economy that many Green economists would challenge.

So the Paris Agreement has provided a new impetus to decarbonise our economy, as well as an accepted urgency in responding to the threats from climate change. This has led to a flurry of sustainable finance measures across the EU.

Not all sustainable investments are equal

Examples include the French law of disclosure which requires investors to disclose how they factor ESG criteria and carbon-related aspects into their investment policies; German leadership in the field of public investment in the energy transition; the Bank of England’s timely action in encompassing the threat to financial stability from ‘stranded fossil fuel assets’ and Sweden’s ambitious agenda to integrate sustainability into its daily work.

The EU institutions are also bound by the Paris Agreement. This gives MEPs a useful platform from which to criticise some actions which are clearly not sustainable. A glaring example is the decision by the European Investment Bank to lend nearly €2.5bn to finance the Southern Gas Corridor which will lock Europe into gas dependency beyond the 2050 date when we have agreed to phase out fossil fuels.

Indeed, the vast majority of investment and lending is still not compatible with internationally agreed climate objectives or environmental, social and corporate governance criteria. The EU Commission estimates that realising the Sustainable Development Goals will require annual investments in sustainable infrastructure worth €4.7-6.7 trillion.

Beyond climate

We also need to look beyond climate change. While this is the most pressing ecological crisis we face, there are other serious threats to the future of humanity and other life on earth. Examples include the exhaustion of water supplies, the pollution of the water-table, deforestation, loss of habitats, soil degradation and the threat to food supplies.

So far sustainable finance has encompassed only climate risks but this is just the first step and in future will need to include consideration of the wider ecological crises we face.

Despite the positive steps forward, the current pace of development of green finance and clean energy investments is too slow to meet the objectives of the Paris Agreement, not to mention the other ecological crises and inadequate standards of social protection and governance.

The ambition of the Commission on sustainable finance is to be applauded. But the EU must now show global leadership in this area and use the power of money to enable and accelerate the stabilisation of the climate and the protection of the global ecosystem for the sake of current and future generations.

Molly Scott-Cato is Green MEP for the South West of England and European Parliament rapporteur on sustainable finance. You can read the report here.

Scott-Cato will speak at this year’s Climate Innovation Summit in Dublin as part of our focus on innovation for sustainable finance. Read more about the event here.