'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 are associated with the concept of ESG (environmental, social, governance) factors.
Sustainable finance is sometimes also referred to as green finance, however, although there are some overlaps, it seems these terms should be differentiated.
Sustainable finance legal framework is based on the common understanding of some basic concepts, in particular:
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).
Hence, the disclosure obligations laid down in the Taxonomy Regulation supplement the rules on sustainability-related disclosures and the rules on transparency in pre-contractual disclosures and in periodic reports stipulated in the SFDR (Recital 19 of the Taxonomy Regulation).
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, in particular:
- the Non-Financial Reporting Directive (Directive 2014/95/EU - the NFRD and its successor CSRD), and
- 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.
To sum up - the three key building blocks for the EU sustainable financial framework are:
- the EU taxonomy as a classification system,
- a mandatory disclosure regime in form of the CSRD and SFDR and
- benchmarks, standards and labels including the two new benchmarks created by the Benchmark Regulation.
24 January 2022
16 December 2021
16 September 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
6 July 2021
- European Commission Communication, Strategy for financing the transition to a sustainable economy, COM(2021) 390 final
- Summary of the results of the consultation held from 6 April until 15 July 2020
- Transition finance report by the Platform on Sustainable Finance, published in March 2021
- Factsheet on the strategy for financing the transition to a sustainable economy
- Staff working document accompanying the strategy
23 June 2021
21 April 2021
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
28 January 2021
3 November 2020
15 July 2020
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
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
6 February 2020
18 December 2019
17 December 2019
17 November 2019
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
24 May 2018
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)