'Sustainable finance’ generally refers to the process of taking due account of climate, environmental and social considerations in investment decision-making, leading to increased investments in longer-term and sustainable activities (European Commission Communication of 6 July 2021, Strategy for financing the transition to a sustainable economy, COM(2021) 390 final, p. 1).


In particular, references to sustainable finance (sometimes also referred to as green finance) are associated with the concept of environmental, social and governance (ESG) factors.

         
          
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As underlined by the EBA Discussion Paper of 3 November 2020 on management and supervision of ESG risks for credit institutions and investment firms (EBA/DP/2020/03), sustainable finance relates to financing to support economic growth while reducing pressures on the environment and taking into account social and governance aspects.

 

Sustainable finance also encompasses transparency on risks related to ESG factors that may impact the financial system, and the mitigation of such risks through the appropriate governance of financial and corporate actors.


The said EBA document also observes that the current policy framework lacks a common definition of ESG factors and, hence, current market practices also vary across institutions.

 

Institutions have been relying on various international frameworks and standards defining ESG factors, although some of them use their own definitions.

 

Examples of ESG factors that are common across those definitions and practices for financial and non-financial firms include greenhouse gas emissions, biodiversity and water use and consumption in the area of environment; human rights, and labour and workforce considerations in the area of social; and rights and responsibilities of senior staff members and remuneration in the area of governance.

 

Taking the above into consideration, the EBA proposes the following definition for the ESG factors: 'environmental, social or governance characteristics that may have a positive or negative impact on the financial performance or solvency of an entity, sovereign or individual’ (p. 26).

 

 

International dimension 

 

 

At the international level, there has been a number of initiatives by international bodies to frame ESG factors:


a. the United Nations’ Principles for Responsible Investment (UNPRI) aim at supporting its signatories –i.e., (i) asset owners/institutional investors, (ii) investment managers and (iii) service providers, including consultancy, information and data- to incorporate ESG factors into their investment and ownership decisions;


b. the United Nations’ Environment Programme Finance Initiative (UNEP FI)’s Principles for Responsible Banking, aim at aligning the banks’ business strategy with the objectives of the SDGs and the Paris Agreement;


c. the Global Reporting Initiative’s from the Global Sustainability Standards Board (GRI-GSSB), aim at helping organisations to better understand, manage and communicate their impacts on issues relating to sustainability;


d. the Equator Principles, adopted by financial market institutions, which provide a common baseline and framework to identify, assess and manage environmental and social risks when financing projects;


e. the Natural Capital Protocol + Supplement (Finance), which provides a standardised framework for organisations to identify, measure, and value their impacts and dependencies on natural capital.

 

Regulations at the European level

 

 

At the European level, a main legal reference to frame ESG factors is the Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (Sustainable Finance Disclosure Regulation - SFDR).

 

The SDFR aims at enhancing transparency and informing end investors about sustainability-related aspects, particularly in terms of ‘[the principal’s] adverse impacts’, which could be understood as those impacts of investment decisions and advice that result in negative effects on sustainability factors.


The SDFR does not provide granular information on the characteristic of sustainability factors, however, it provides a definition of sustainability factors meaning environmental, social and employee matters, respect for human rights, anti‐corruption and anti‐bribery matters.

 

The EU framework for a sustainable finance is complemented by:

 

1. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (Taxonomy Regulation),

 

2. Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks (Benchmarks Regulation).

 

The Taxonomy Regulation complements the SFDR by requiring those financial market participants that are subject to the disclosure obligations set out in SFDR to disclose the degree of environmental sustainability of the financial products that they claim pursue environmental objectives (FAQs, Commission Technical Expert Group on Sustainable Finance).

 

The disclosure requirement under the Taxonomy Regulation will have to reference the EU taxonomy to show how and to what extent the criteria are used to determine the environmental sustainability of the investment.

 

This disclosure will allow investors to understand and compare more easily the degree of "greenness" of investment strategies.

 

The Taxonomy Regulation therefore provides more clarity on what green investments offer in terms of environmental outcomes. It also provides clear signals to economic operators on what constitutes substantial contribution to environmental objectives.

 

Financial market participants offering ‘green’ financial products will therefore have to:

  • disclose how they reach their environmental sustainability target under the SFDR – having some freedom in how to best describe their environmental investment strategies;
  • reference the EU taxonomy when describing the degree of ‘greenness’ of the given product.

This will introduce an element of comparability, without prejudging those green investments that do not contain underlying economic activities from the EU taxonomy.

 
This framework is complemented by the wide variety of further specific provisions, for example the Non-Financial Reporting Directive (Directive 2014/95/EU, the NFRD) or Article 53 of the Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (IFR) on the disclosure of environmental, social and governance risks by investment firms. 

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Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (IFR)

Article 53
Environmental, social and governance risks

From 26 December 2022, investment firms which do not meet the criteria referred to in Article 32(4) of Directive (EU) 2019/2034 shall disclose information on environmental, social and governance risks, including physical risks and transition risks, as defined in the report referred to in Article 35 of Directive (EU) 2019/2034.

The information referred to in the first paragraph shall be disclosed once in the first year and biannually thereafter.

 

 
 

 

 

 

 chronicle   Regulatory chronicle

 

 

 

  

September 2021

 

The Sustainability Disclosure Regime of the European Union, ICMA


16 September 2021

Commission Notice, Technical guidance on the climate proofing of infrastructure in the period 2021-2027 (2021/C 373/01)


27 August 2021

 

Development of Tools and Mechanisms for the Integration of ESG Factors into the EU Banking Prudential Framework and into Banks' Business Strategies and Investment Policies, Final Study, BlackRock Financial Markets Adisory

 

3 August 2021


Call for feedback by the Platform on Sustainable Finance on preliminary recommendations for technical screening criteria for the EU taxonomy

 

6 July 2021

 
European Commission puts forward new strategy to make the EU's financial system more sustainable

 

 

23 June 2021

 

Report on management and supervision of ESG risks for credit institutions and investment firms

 

21 April 2021

 

Sustainable Finance and EU Taxonomy: Commission takes further steps to channel money towards sustainable activities

 

Commission Delegated Regulation of 21 April 2021 amending Delegated Regulation (EU) 2017/565 as regards the integration of sustainability factors, risks and preferences into certain organisational requirements and operating conditions for investment firms (C(2021) 2616 final)

 

Commission Delegated Directive of 21 April 2021 amending Delegated Directive (EU) 2017/593 as regards the integration of sustainability factors into the product governance obligations (C(2021) 2612 final)

 

1 March 2021

 

EBA advises the Commission on KPIs for transparency on institutions’ environmentally sustainable activities, including a green asset ratio

 
EBA launches public consultation on draft technical standards on Pillar 3 disclosures of ESG risks


March 2021

 

Transition finance report, Platform on Sustainable Finance

 
February 2021

 

Final Report, Proposals for a Relevant and Dynamic EU Sustainability Reporting Standard-Setting, European Reporting Lab (@EFRAG)

 

28 January 2021

 

ESMA letter on ESG ratings, ESMA30-379-423

 

3 November 2020

 

EBA Discussion Paper on management and supervision of ESG risks for credit institutions and investment firms (EBA/DP/2020/03)

 

15 July 2020

 

ESMA Response to the EC public consultation on a Renewed Sustainable Finance Strategy, ESMA30-22-821

 

22 June 2020

 

Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 published in the Official Journal of the EU

 

12 June 2020

 

European Commission consultation on the establishment of an EU Green Bond Standard


23 April 2020

 

ESAs Joint Consultation Paper, ESG disclosures, Draft regulatory technical standards with regard to the content, methodologies and presentation of disclosures pursuant to Article 2a, Article 4(6) and (7), Article 8(3), Article 9(5), Article 10(2) and Article 11(4) of Regulation (EU) 2019/2088, JC 2020 16

 

15 April 2020

 

Council of the EU Press release, Council adopts a unified EU classification system

 

6 February 2020

 

ESMA Strategy on Sustainable Finance, ESMA22-105-1052

 

18 December 2019


Council of the EU Press release, Sustainable finance: EU reaches political agreement on a unified EU classification system

 

17 December 2019

 

Proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment (COM (2018) 353 final)

 

17 November 2019

 

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector

 

Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks 

 

23 October 2019

 

Regulation of the European Parliament and of the Council on sustainability-related disclosures in the financial services sector, 2018/0179 (COD), PE-CONS 87/19

 

24 May 2018 

 

European Commission Press release, Sustainable finance: Making the financial sector a powerful actor in fighting climate change

 

Frequently asked questions: Commission proposals on financing sustainable growth

 

 

 

 

 

IMG 0744

    Documentation    

 

 


 

 

Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (Taxonomy Regulation)

 

Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector (SFDR)

 

Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks 


Communication from the Commission — Guidelines on non-financial reporting: Supplement on reporting climate-related information, C/2019/4490, 20 June 2019C/2019/4490, 20 June 2019

 

How to improve climate-related reporting, a summary of good practices from Europe and beyond, Project Task Force on Climate-related Reporting, EFRAG, February 2020

Commission guidelines on non-financial reporting

 

FAQs, Commission Technical Expert Group on Sustainable Finance

 

Taxonomy: Final report of the Technical Expert Group on Sustainable Finance, March 2020

 

Taxonomy report, Technical Annex, March 2020
 

 

 

 

 

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    Links    

 

 

 


 

European Commission website on a sustainable finance

Platform on sustainable finance

 
International platform on sustainable finance

 

Green Bond Standard (GBS)

 

Technical expert group on sustainable finance (TEG)

 

Climate and Sustainable Finance Commission, AMF

 

European Corporate Reporting Lab @ EFRAG 

 
Non-financial reporting, the European Commission's website