Leo Donnachie
Senior Policy Manager - Sustainable Finance
With the European Parliament’s 2024 election looming we reflect on the European Commission President’s final State of the Union Address of this term, the EU’s climate policy achievements over the last five years, and what investors might expect next.
On 13 September, Ursula von der Leyen, President of the European Commission delivered her final State of the Union Address of the term. She emphasised the need to double down on the implementation of existing climate initiatives and to wrap up any proposed but yet-to-be-agreed regulations between now and the end of the current mandate.
The 2019-2024 mandate has delivered numerous milestones for European climate policy, most notably the EU Green Deal which set out its ambition to become the first climate-neutral continent. The Commission also launched a renewed sustainable finance strategy, building on the foundations of the 2018 Sustainable Finance Action Plan with a series of measures that place financing the transition at its heart.
“Europe is open for competition, not a race to the bottom.”
Pivotal though these packages are, the EU must go further and faster to achieve its ‘Fit for 55’ target of 55% emissions reductions by 2030. This includes stepping up implementation of the Green Deal, viewed as the engine that accelerates progress. More work is also needed to ensure that the concept of transition finance is fully embedded in the EU’s regulatory framework.
It’s in this context that investors may well ask what the Commission will address now, what will be left for the next mandate, and how the EU’s policy agenda can better support the decarbonisation of the economy, channelling finance towards net zero.
Reframing the Green Deal
The EU set its long-term agenda in 2019 and the Green Deal was cited in the address as the cornerstone of this commitment, described as “Europe’s answer to the call of history”.
That call has taken on new meaning as a result of Russia’s invasion of Ukraine and the exacerbated energy crisis. It pushed the EU to reframe the Green Deal through an economic and energy security lens as well as in the context of the urgent need for climate action, including a shift away from dependence on Russian fossil fuels. Recent tragedies and tensions in the Middle East may further test this shift in strategy.
There was also a strong emphasis on ensuring industrial competitiveness for the term ahead. Von der Leyen stressed that “from wind to steel, from batteries to electric vehicles, our ambition is crystal clear - the future of our clean tech industry has to be made in Europe.”
Above: EU Green Deal highlights from the address (01:05)
This nods to the USA’s Inflation Reduction Act and wider international ‘green arms race’. The recently introduced EU Critical Raw Minerals Act and Net Zero Industry Act are intended to serve as tools that send strong price signals in response to this new competition. The first seeks to reduce Europe’s reliance on critical minerals imported from outside its borders, while the second aims to bolster the manufacturing of green technologies.
The Commission President also announced an anti-subsidy investigation into electric vehicles manufactured in China, aimed at protecting European markets: “Europe is open for competition, not a race to the bottom.”
As the new Commission takes office, these packages should increase demand for home-grown sustainable assets while tackling the issues of energy security, independence and affordability.
A material issue for all
Following the adoption of the first set of European Sustainability Reporting Standards in July, President von der Leyen signalled a commitment to making it easier for European companies to do business. She revealed that the Commission will make the first legislative proposals towards “reducing reporting regulations at the European level by 25%.”
Under this proposal, the standards that companies must report against will not be mandatory. Instead, they will be subject to materiality assessment, reducing data availability for investors: data which is vital to assessing company transition plans and informing engagement activities.
This proposal also risks overlooking the fact that climate change should be considered a material issue for all companies of all sizes. Our recent joint statement with Eurosif, the UNEP FI, PRI and EFAMA outlined these concerns.
Tweaks over new regulation was also a theme on the real economy side. This included a nod to the Clean Transition Dialogues for Industry, which ‘aims to support every sector in building its business model for the decarbonisation of industry,’ and the launch of a strategic dialogue on the future of agriculture. This high-emitting sector is likely a heated battle on the horizon due to its sensitive political nature.
We would like to see transition finance placed at the heart of regulation on a consistent basis, given the outsized role investors must play in financing the transition.
Left unsaid
Absent from this final address was any firm indication as to whether Von der Leyen intends to seek a second term in office as Commission President, though she has confirmed that she will not stand as an MEP. Some commentary has suggested this speech could be seen as a pitch for Presidential re-election, but we won’t know until later this year or early into 2024.
There was also no mention of how the Commission plans to stimulate private investment alongside the use of EU funds, or even encourage private finance more generally. We would like to see transition finance placed at the heart of regulation on a consistent basis, given the outsized role investors must play in financing the transition to a climate-neutral economy. This would complement the strong foundations already built around improving transparency and reducing greenwashing.
Nor was there any mention of the EU’s next emissions reduction target for 2040, which will be strongly influenced by the report published by The European Scientific Advisory Board on Climate Change. It recommends a highly ambitious target of cutting emissions by 90-95% by 2040, relative to 1990. This will be a divisive and hard debate for the Commission to manage.
Nevertheless, an undoubtedly bold vision has been set over the last four years and the President should rightly be commended. Now is the time to translate that ambition into concrete action, building on the strong foundations established during the current mandate.
This means upholding and delivering on the ambitions of the EU Green Deal; promoting greater coherency across the sustainable finance framework; and embedding the transition at the core of the European policy agenda.
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