Venice G20 #1: Sustainable Finance

Professor Monica Billio and Professor Loriana Pelizzon

On 6th July, the European Commission announced new measures on sustainable finance and put forward a new strategy to make the EU's financial system more sustainable. The 'Strategy for Financing the Transition to a Sustainable Economy' identifies four key areas to accelerate the green transition: helping to finance the economic transition to sustainability; Making sustainable finance more inclusive for SMEs and citizens; Making the financial system resilient to sustainability risks; Stepping up global ambition.

Sustainable finance and green transition are on the agenda of the Finance Ministers and Governors of the Central Banks meeting in Venice from 8 to 11 July 2021. 

This is the topic discussed by Monica Billio and Loriana Pelizzon, professors at the Department of Economics of Ca' Foscari University of Venice, in the first of a three-part series on the G20 summit. 

The following articles will be Venice G20 #2: sustainability rankings and the risk of greenwashing, and Venice G20 #3: climate and finance

In the last decade, public awareness of the unfolding of climate change and of environmental problems has increased, supported by a body of scientific results.

Moved by growing concerns about climate change’s impacts on the environment, economy and society, citizens and scientists have urged policy makers and firms to integrate climate change and environmental considerations in their regulatory decisions and investment strategies. At the same time, corporate attention towards governance and social issues has become more pressing as a result of some of the effects of the 2008 financial crisis, such as an unprecedented rise in inequality and several cases of corporate embezzlement.

Financial supervisors, including central banks and regulators, have increasingly emphasised the importance of the financial sector in aligning investments to sustainability objectives, and are supporting them to overcome existing challenges. The importance of engaging finance in climate change and sustainability objectives, and the related responsibilities, emerged even more prominently during the COVID-19 pandemic. While the public sector has committed unprecedented resources to the COVID-19 recovery plans, to support citizens and firms in coping with the crisis (Next Generation EU, Renovation Wave, Green Deal), the magnitude of the challenge requires the engagement of the private sector. The design of policies aimed to align the economic recovery to the EU climate and sustainability targets needs to be supported by a deep understanding of the role that finance can play, as well as its enabling and hindering factors. It is important to make financial instruments and in particular long-term financial instruments available to this end, and to create the conditions to secure the stability of the financial system. In this perspective, it is crucial to create sustainable finance instruments that may help to make sustainable investments actually ‘investible’, to foster the business case of financial institutions involvement in the management of transition risks, with the goal to unlock the potential of the financial industry to contribute to the development of a climate resilient and sustainable economy.

A sustainable financial system creates, values and transacts financial assets that can shape real wealth to serve the long-term needs of an inclusive and environmentally sustainable economy.

Sustainable finance refers to any financial instruments whose proceeds are used for sustainable development projects and initiatives, environmental products and policies under the single goal of promoting a green economic transformation toward low-carbon, sustainable and inclusive pathways.

The main goal of sustainable finance is to internalise environmental externalities and long-term risk perception to mitigate both dimensions. Promoting sustainable finance on a large and economically viable scale helps to ensure that sustainable investments are prioritised over business-as-usual investments that perpetuate unsustainable growth patterns. Green finance encourages transparency and long-term thinking of investments flowing into environmental objectives and includes all sustainable development criteria identified by the UN Sustainable Development Goals (SDGs).

Sustainable finance covers a wide range of financial products and services, which can be divided into investment, banking and insurance products. To meet the growing demand, new financial instruments, such as green bonds and carbon market instruments, have been established, along with new financial institutions, such as green banks and sustainable funds. Renewable energy and energy efficiency investments, sustainable infrastructure finance and green bonds continue to be areas of most interest within sustainable financing activities.

Energy efficiency is having an increasing attention and is the core of the European Renovation Wave Strategy.

To put the potential into perspective it is important to underline that the European building stock accounts for 40% EU energy use and 36% of gas emissions; more than 210 million units (equal to 89%) of the EU´s residential building stock were built before the year 2001, meaning substantial efforts are required to bring energy inefficient homes in line with new energy standards. To reach EU 2050 targets, 200 billion euro of yearly investments are needed and a significant share of it must come from the private sector. 

Mortgage and housing markets can leverage consumer demand and drive the qualitative upgrade of the energy profile of the residential building stock and of lending institutions’ portfolios, thereby scaling-up private market support for the NextGenerationEU vision, the EU Renovation Wave Strategy and the EU Green Deal. From a broader perspective, the underlying de-risking assumptions also drive an incentive chain that can provide an economic advantage to all stakeholders involved: borrowers, lenders, investors and small and medium-sized enterprises (SMEs). In addition, the private investments foreseen could provide a flow of capital into the real economy and in doing so support privately held companies, e.g. SMEs, engaged in renovation meanwhile encouraging innovation and stimulating start-ups in the field of energy efficiency.

Ca’ Foscari is the main academic partner of the Energy Efficient Mortgages Initiative (EEMI), which is coordinating the creation of a green mortgage and more importantly a new green market ecosystem with strong cooperation among private stakeholders and institutional policy actions. By way of 4 Horizon 2020 projects (EeMAP, EeDaPP, EEMMiP and TranspArEEnS) with the institutional support from the European Commission, the European Banking Authority, the European Investment Bank, the European Investment Fund, the European Bank for Reconstruction & Development and the OECD, the EEM Initiative can play a game-changing role in supporting the EU’s energy savings targets and the Renovation Wave.

Ca’ Foscari thus welcomes the launch of the European Commission's New Sustainable Finance Strategy and a European Green Bond Standard and in particular the words of Vice President Dombrovskis and Commissioner McGuinness at the press conference:

Vice President Dombrovskis: "To encourage green retail lending, the Commission will ask the European Banking Authority for its views on best ways to press ahead with green retail loans and green mortgages. We will also examine how to promote more use of energy-efficient mortgages in the upcoming review of EU mortgage credit rules."

Commissioner McGuinness: "The Strategy will also build a more inclusive sustainable finance framework. And that means taking along SMEs and retail investors. So we are exploring green mortgages and green loans."

The Energy Efficient Mortgages Initiative is actively putting these words into action and the new Energy Efficient Mortgage Label will permit to build EU Taxonomy-compliant portfolios and to deliver a new sustainable ecosystem which is rooted in the banking sector and will paint the Capital Markets Union green.


Written by Monica Billio and Loriana Pelizzon, Full Professors of Econometrics and Political Economy at the Department of Economics of Ca’ Foscari University of Venice.