Mr Giegold, in March 2018 the European Commission presented its “action plan on financing sustainable growth”.¹ The Council and the European Parliament are taking different approaches to the issue of sustainability in the financial sector. Why do you think that is?

In the European Parliament, we have, with an eye towards the completion of the Capital Markets Union, successfully advocated a pan-European approach to sustainable financial markets. With good standards, the EU² can make itself the world’s lead market for sustainable investment. The Council, meanwhile, has overall advocated for weaker, less binding rules than the Parliament. For the Council, the emphasis has unfortunately often been on protecting national interests and those of old industry, such as fossil fuels and nuclear energy. The EU has to fulfil its obligations under the Paris Agreement and involve the financial sector in the collective protection of the environment and the climate. We have therefore campaigned in Parliament for legislation to link sustainable finance with the Paris Agreement. This includes extending the definition of sustainability risks so that it covers not just financial risks but also actual risks to humankind and the environment.

Why would the European Parliament like management board members’ actions with regard to sustainability to be a factor in the calculation of their remuneration?

It would be better for our economy if the variable remuneration received by management board members were more dependent on the long-term success of the company. Short-term profit maximisation as a measure for the success of a company, meanwhile, has proved harmful. Sustainability, for instance preventing environmental damage, or avoiding the high costs that would be associated with violations of the law, has a significant effect on the future success or failure of a company. However, this can lead to inconsistencies when harmful business actions are lucrative in the short term and the risk takers themselves are no longer there to feel the effects of the future consequences. The incentives for good corporate governance should therefore overall be brought in line with sustainability and pressing issues for society such as climate protection.

Isn’t saving the environment primarily a job for society?

The financial sector does not exist in a vacuum, separate from society; it is part of society, and should therefore play a role in protecting the environment and the climate. A sustainable financial system can serve as a framework to create incentives and strengthen market signals to channel capital into green investments. It is of key importance that sustainability risks are transparent so that investors are better able to assess the real risks of their investments and can adapt their investment strategies at an early stage. A green financial sector, however, is not an alternative to investments in a green economy and definitive environmental legislation. Quite the reverse, in fact: financial markets can only finance investments that are economically viable. If rapid ecological transformation leads to an overall increase in investments, this is beneficial for the financial sector. That is why we are looking for partners in the financial industry – in order to implement a consistent climate policy, for example.

How does the European Parliament intend to incentivise the private sector to invest in helping to save the environment? What do you believe is the role of financial regulation in this context? Specifically: would you argue in favour of privileges for “green finance” in financial regulation, regardless of the riskiness of the investments?

There is already a demand for sustainable investments. What we are missing are unambiguous definitions and transparency about investments in order to effectively combat “greenwashing”. The EU classification system (the taxonomy) and the new disclosure rules are therefore of key importance for green finance. The taxonomy is the most important building block for the sustainable finance initiative, because it provides clarity for all stakeholders on what is meant by a sustainable investment. In our view, the taxonomy should not only define areas that are green and sustainable but also those that are “brown” and damaging to the climate or the environment. Clear disclosure rules for investment strategies and financial products improve transparency and therefore trust in green financial markets. The stability of the financial markets can be improved by small and large investors recognising and taking into account the environmental risks of their investments at an early stage.

It is also important that customer advice in the future includes questions regarding sustainability preferences as standard. This is the only way that investors can make informed decisions about their investments, taking into account their preferences regarding the consequences of their investments for humankind and the environment. The two green benchmarks that have recently been agreed are another important success for sustainable finance and against greenwashing, because they require the companies involved to document the measures they take to protect the climate.

In addition to the initiatives that have been implemented so far, the Green group³ is pressing for the introduction of an EU standard for green bonds and an EU label for green financial products, comparable to the EU Ecolabel, to promote sustainable finance. This would lead to pressure from end customers, too, to establish a sustainable financial system.

We do not support capital relief for sustainable investments made by banks and insurance undertakings. Capital requirements for green investments must only be reduced if it can actually be proven that they are lower risk. But as a rule, innovative technologies and investments are not lower risk. BaFin⁴ will need to act soon and take environmental, social and governance (ESG) risks into account in the SREP⁵. Banks that disregard ESG risks or violate human rights have a higher level of risk and should be required to hold more capital.

At the moment, the focus for ESG criteria is still on the “E” for “environment”, covering topics such as pollution, greenhouse gas emissions and energy efficiency. What are your thoughts on S and G⁶?

The environmental taxonomy that has been agreed so far contains minimum standards for social factors, and we succeeded to strengthen these considerably compared to the proposals made by the Commission. Companies that claim to be sustainable will therefore also need to comply with the UN’s international human rights framework. In order that the social factors can be taken into account even better in the future, here too a classification system is needed in the medium term that sets out common terms and standards. The priority here, alongside human rights, is respect for workers’ rights. The Commission, in its planned proposal for a social classification system, should build on the European Pillar of Social Rights. For the classification system for governance, particularly important factors would include a functioning compliance department, the avoidance of money laundering risks and internal and external communication channels for whistleblowers.

Mr Giegold, thank you for the interview.

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