Shaping Europe’s financial future

Mairead McGuinness, EU Commissioner for Financial Services, Financial Stability and Capital Markets Union, talks to Elaine O’Regan about her role in implementing sanctions to stop the “Kremlin war machine”, her ongoing contribution to the future of sustainable finance  and her role in laying the foundations for the Capital Markets Union.

You’re 18 months into your role as EU Commissioner. What do you see as your most important achievements so far, and what are your priorities now?

I am responsible for sanctions and their implementation by the Commission and this is top of my agenda right now, given the terrible war in Ukraine and the need to respond to Russian aggression. We want to cut off funding to the Kremlin war machine. 

We’ve listed hundreds of individuals, including Vladimir Putin, his Foreign Minister Sergey Lavrov and dozens of oligarchs, which means their assets are frozen. They can’t be provided with funds, and they are also subject to travel bans. 

We’ve cut Russian access to EU capital markets, including a full asset freeze on three Russian banks with strong links to the Russian state, excluding seven key Russian banks from Swift, and blocking Russia’s EU-held foreign exchange reserves. 

We also have measures on energy, transport, dual-use technologies, trade, visas for diplomats and disinformation. And, we have sharpened sanctions against Belarus, so it cannot be used by Russia to evade our sanctions. 

At the same time, we’ve been working closely with our partners, including the US, Britain, Canada, Australia, Japan and others, to impose comprehensive and complementary measures that ensure Russia’s illegal actions bear a high cost.

The focus now is on making sure that the sanctions are properly implemented so they are as effective as possible – and we stand ready to put more sanctions in place as the situation evolves.

Beyond this, over the past 18 months my work on sustainable finance and the contribution of finance to tackling climate change has been important, as well as work on building up the Capital Markets Union to give companies across the EU better access to finance. 

I’m also passionate about using my role to highlight the importance of financial literacy. People should understand how the financial system works, how they can make the best use of their money, and be confident enough to ask the right questions about their personal finances.

The Ukraine invasion has placed energy supply at the forefront of the EU agenda. How do you expect the situation in Ukraine, and its impact on the flow of energy supply globally, to influence the policy initiatives laid out in the EU Green Deal? 

Russia’s aggression against Ukraine makes a rapid transition to clean energy more urgent than ever. We’re too dependent on Russian gas. We must have a reliable, secure, and affordable supply of energy for Europe. 

We already have the Green Deal indicating where we need to go, but Russia’s aggression has brought into very sharp focus our vulnerabilities and why we need to accelerate the transition to a more sustainable economy. 

The Commission adopted a plan in March – REPowerEU – with new ways to ramp up green energy production, diversify supplies, and reduce demand for Russian gas. 
The financial system has a key role to play in the Green Deal. The goal is both “to green finance” and “to finance green” to help the financial sector become sustainable and to make sure that the financial sector provides the money for business to become sustainable. 

We’ve put clear and consistent rules in place, namely the EU Taxonomy, a disclosure regime for non-financial and financial companies; and investment tools, including benchmarks and standards like the European Green Bond Standard. 

We are now increasingly moving to the implementation phase to make sure these rules are effective. 

How far along is the Taxonomy at this point, and what are the next steps in the pipeline for the year ahead? What do companies operating in the EU need to know?

The Taxonomy helps signpost the way for private investment to contribute to our climate goals: it provides clear definitions for sustainable economic activities. Companies can use it to plan their transition and to show the market what they are doing. 

Last year, we adopted the first rules on activities that make a substantial contribution to adapting to and mitigating climate change. 

They cover 170 economic activities, representing about 40 per cent of listed companies in the EU, in sectors responsible for around 80 per cent of direct greenhouse gas emissions in Europe. 

The rules are applicable from January 2022. We have also specified how market players should disclose the extent that their activities are taxonomy-aligned.

We’ve put forward proposals for how gas and nuclear can make a contribution to the transition to sustainability. We have not designated gas and nuclear as “green”, but we have recognised the specific role certain nuclear and gas activities can play in the transition to full sustainability, subject to very strict conditions and phase-out periods. This proposal is now under scrutiny by the European Parliament and the Member States.

We have work to do on including more sectors in the Taxonomy and we will be preparing details on the four remaining environmental objectives – water quality, circular economy, biodiversity, and pollution prevention.

The International Sustainability Standards Board (ISSB) is expected to put its first set of standards to public consultation later this month. How do you foresee the EU Commission working with the ISSB to progress the wider ESG reporting agenda? 

The EU has been the global leader on sustainable finance. We are ahead when it comes to the contribution of the financial system to tackling climate change. So, we’ve gone further than others, and we’ve done that faster – which is important given the urgency of the climate challenge.

But, of course, the climate challenge is global, and markets are global too. So, we are fully engaged in efforts on global standards. EU sustainability reporting standards have shown the way, to a great extent, and informed the international context. 

We see global standards as a common baseline that allow us to go further to meet the ambition set out in the EU Green Deal. 

At a practical level, the body that drafts EU accountancy and sustainability standards – the European Financial Reporting Advisory Group (EFRAG) – has established close cooperation with the ISSB.

The CSRD proposal – and the reporting standards that will be part of it – will ensure that corporates disclose sustainability information that underpin the rest of the sustainable finance agenda. 

EU standards must be coherent with the EU’s political ambitions and with our existing framework for sustainable finance, including the Taxonomy and the Sustainable Finance Disclosure Regulation. 

From the beginning, EU standards will cover all ESG topics under a double materiality perspective – companies will have to report about how sustainability issues affect them and about their own impact on society and the environment. 

In contrast, the standards set by the ISSB only look at risks to companies, but not at the impact of companies, and in the first instance they are focusing on climate. 

EU standards will build on and contribute to global standardisation initiatives. We should build on what exists, and seek as much compatibility as possible, while also meeting Europe’s specific needs.

At the recent IIF Sustainable Finance Summit, UBS Chairman Axel Weber said “banks can be a facilitator of channelling money into the right uses for a carbon transformation of the economy, but it’s not a banking issue.” What’s your take on this stance?

All financial institutions, including banks, but others too, need to play their part in the transition to climate neutrality and improve their environmental performance as part of their financing, lending, and underwriting activities. 

Financial institutions should integrate EU sustainability goals into their long-term financing strategies and investment decision-making processes. 

We will help them accelerate their contribution to the transition, by reinforcing science-based target setting, disclosure and effectiveness of decarbonisation action, but also monitoring the financial sector’s commitments.

The Corporate Sustainability Reporting Directive (CSRD) is being viewed as a crucial step in bringing sustainable reporting on par with financial reporting. It will require assurance on non-financial statements, however. Who do you foresee this responsibility falling to?

The CSRD proposal requires statutory auditors to give an opinion on sustainability reporting – the idea is to ensure that the sustainability information disclosed is credible. 
This will require statutory auditors to have the necessary skills in the assurance of sustainability reporting, helping to ensure that financial and sustainability information is connected and consistent. 

We are mindful of the potential risk that the audit market could become even more concentrated, however. That’s why the proposal allows Member States to accredit independent assurance service providers to verify sustainability reporting.

The proposal for the EU Green Bond Standard was published by the European Commission in July 2021 as part of the Strategy for Financing the Transition to a Sustainable Economy. Tell us about this proposed regulation.

 Green bonds offer a great opportunity for financial markets to directly support the transition to a climate-neutral economy. They bring issuers reputational benefits and sometimes also a lower cost of funding. 

They give investors transparency about how companies allocate their money. So green bonds make business sense as well as climate sense — and the market is booming.
Last year, after many years of on average 40 percent growth, issuance increased by another 65 percent compared to the previous year. 

However, there are some challenges. As new issuers enter the market, there is less consensus on what is green. This means more effort for issuers to prove their green credentials, and more work for investors to check them. 

Companies acting as external reviewers of green bonds help investors navigate this complex landscape, but the wide range of methodologies they use can also be a source of confusion. 

That’s why in July 2021, the Commission adopted a legislative proposal for a European green bond standard, as part of its work to guide investors towards greener investments. The overall aim is to create a new gold standard available to all green bond issuers on a voluntary basis. 

While building on market best practice on reporting and external review, this standard would add two important new elements. First, full alignment with the EU Taxonomy, to ensure that funds raised by these bonds are spent on economic activities that are sustainable. Second, supervision by ESMA of external reviewers that provide opinions on the alignment with the standard. 

There is already a lot of interest from both issuers and investors. But, in the end, success depends on whether we keep the environmental ambition high, and the unnecessary burden on issuers low. Negotiations are ongoing in the European Parliament and the Council, and we are hoping that an agreement can be reached as soon as possible.  

You recently indicated that a bill to introduce a digital euro may be tabled in the EU in early 2023, providing a legislative framework for the ongoing work of the European Central Bank on a digital version of the euro. What are the potential benefits of introducing this digital euro?

A digital euro would be to complement cash – which remains vital – and other means of payment provided by the private sector. 

A digital euro would provide a digitalised form of money backed by a central bank, which would be designed to allow everyone to use it, from the tech savvy to those excluded by the financial system. How exactly it should be designed to meet those goals is currently being examined. 

Other countries are working on or are already issuing central bank digital currencies, and the use of stablecoins is increasing. A digital euro would strengthen the EU’s ability to determine its own course and maintain the autonomy of EU monetary policy.

 The digital euro raises challenges, but also opportunities. This is why we are working hand in hand with the ECB and listening to all stakeholders on this key project. 

The ECB would be responsible for issuing any digital euro, while the Commission would need to put forward the legislative framework to allow the ECB to do so. 

Currently, we are looking at early 2023 to introduce the proposal to give time for the Parliament and EU Member States to work before the ECB would decide how and whether to issue a digital euro.

The EU is responding to the need for improved online security for cryptocurrencies with the Markets in Crypto-Assets Regulation and Digital Operational Resilience Act. What do you see as the biggest risks in this area?

Unfortunately, the level of operational resilience in the crypto-asset space is not good enough. There are also a lot of hacks and thefts. 

The Markets in Crypto-Assets Regulation (MiCA) will bring crypto into the regulated space and will mean that crypto service providers are covered by financial services legislation. 

MiCA will put in place consumer protection measures and limit the risk of fraudulent behaviour in the market. 

The Digital Operational Resilience Act (DORA) is for the whole of the financial services sector, to ensure ICT risks are better managed by financial companies.

When MiCA enters into force, crypto service providers will have to adhere to the highest levels of operational resilience, as they will also be covered by DORA. DORA and MiCA are currently part of negotiations between the EU institutions.