‘Sustainable finance' generally refers to the process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions, leading to increased investment in longer-term and sustainable activities.
- Environmental - Environmental considerations refer to climate change mitigation and adaptation, as well as the environment more broadly and the related risks (e.g. natural disasters).
- Social - Social considerations may refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities.
- Governance - The governance of public and private institutions, including management structures, employee relations and executive remuneration, plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.
EU sustainable finance: A rapid evolution
The area of sustainable finance is rapidly evolving to meet the expectations of a wide range of stakeholders, including investors, policy makers, regulators, central banks, civil society more broadly, as well as to meet the needs of fund managers themselves. In the EU, a new regulatory framework for sustainable finance is rapidly taking shape, following the publication of the European Commission’s Action Plan on Sustainable Finance in March 2018. The objectives of this ambitious and pioneering initiative are to re-orient capital flows towards sustainable investments, mainstream sustainability risk into risk management and foster transparency and long-termism in markets.
The includes a wide range of initiatives such as:
- The Taxonomy Regulation creating a unified classification system for sustainable activities
- The Sustainable Finance Disclosure Regulation to provide for consistent disclosure requirements in relation to sustainability
- A Low Carbon Benchmarks Regulation to provide standardised sustainability benchmarks
- New secondary legislation or ‘delegated acts’ to integrate sustainability risks and factors into the UCITS, AIFMD framework
- New delegated acts’ to integrate sustainability risks and factors into the MiFID and IDD frameworks (including integrating sustainability considerations into financial advice)
- The development of a green bond standard
- The development of an EU Ecolabel for financial products
- Updating of corporate non-financial reporting under a review of the Non-Financial Reporting Directive
New requirements under the Sustainability Disclosures Regulation are applicable from 10 March 2021, with further requirements becoming applicable in June and December 2021 and January 2022, by which stage the EU Taxonomy Regulation will also begin to apply.
The Action Plan is aligned to a proposal for a new EU Climate Law placing sustainability at the core EU policy-making and the European Green Deal, a plan to transition Europe to climate neutrality by 2050.
The publication by the European Commission of a consultation on a renewed sustainable finance strategy means that sustainable finance will ensure that sustainable finance will continue to evolve in the years ahead.