What is sustainable finance?
Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects. Environmental considerations might include climate change mitigation and adaptation, as well as the environment more broadly, for instance the preservation of biodiversity, pollution prevention and the circular economy. Social considerations could refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities, as well as human rights issues. 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.
In the EU's policy context, sustainable finance is understood as finance to support economic growth while reducing pressures on the environment and taking into account social and governance aspects. Sustainable finance also encompasses transparency when it comes to risks related to ESG factors that may have an impact on the financial system, and the mitigation of such risks through the appropriate governance of financial and corporate actors.
Why is sustainable finance important?
Sustainable finance has a key role to play in delivering on the policy objectives under the European green deal as well as the EU’s international commitments on climate and sustainability objectives. It does this by channelling private investment into the transition to a climate-neutral, climate-resilient, resource-efficient and fair economy, as a complement to public money. Sustainable finance will help ensure that investments support a resilient economy and a sustainable recovery from the impacts of the COVID-19 pandemic.
The European Union strongly supports the transition to a low-carbon, more resource-efficient and sustainable economy and has been at the forefront of efforts to build a financial system that supports sustainable growth.
In 2015, landmark international agreements were concluded with the adoption of the UN 2030 agenda and sustainable development goals and the Paris climate agreement. The Paris climate agreement, in particular, includes the commitment to align financial flows with a pathway towards low-carbon and climate-resilient development.
On 11 December 2019, the Commission presented the European green deal, a growth strategy aiming to make Europe the first climate-neutral continent by 2050.
As part of the green deal, the Commission presented on 14 January 2020 the European green deal investment plan, which will mobilise at least €1 trillion of sustainable investments over the next decade. It will create the right environment – or ‘enabling framework’ – to facilitate and stimulate the public and private investments needed for the transition to a climate-neutral, green, competitive and inclusive economy.
The Commission presented on 17 September 2020 its 2030 climate target plan, with an increased emissions reduction target of 55% by 2030 as compared to 1990. The EU needs to invest approximately 350 billion Euro more every year during the 2021-30 decade than it did during the previous decade, in order to meet these 2030 climate and energy targets. The EU is already providing impetus to help attract the required investments with the European Fund for Strategic Investments and other initiatives. However, the scale of the investment challenge is beyond the capacity of the public sector alone. The financial sector has a key role to play in reaching those goals. It can
- re-orient investments towards more sustainable technologies and businesses
- finance growth in a sustainable manner over the long-term
- contribute to the creation of a low-carbon, climate resilient and circular economy
To this end, the Commission has since 2018 been developing a comprehensive policy agenda on sustainable finance, comprising the action plan on financing sustainable growth and the development of a renewed sustainable finance strategy in the framework of the European green deal and the new strategy for financing the transition to a sustainable economy. The Commission is also coordinating international efforts through its International platform on sustainable finance.
Keep up-to-date: check the latest steps for sustainable finance
A new sustainable finance strategy and implementation of the action plan on financing sustainable growth
Within the framework of the European green deal, the Commission announced a renewed sustainable finance strategy.
The Commission published its ‘strategy for financing the transition to a sustainable economy’ on 6 July 2021. It builds on previous initiatives and reports, such as the 2018 action plan on financing sustainable growth (see the staff working document accompanying the strategy on the implementation of the action plan) and the reports of the Technical Expert Group on Sustainable Finance. It also builds on the feedback to a consultation held between 8 April and 15 July 2020. The consultation sought the views and opinions of individuals, public authorities and private organisations – both within the EU and beyond. The responses to this consultation are summarised in a report published by the Commission on 10 February 2021.
The new strategy proposes action in a number of areas. First, it will consider extending the EU taxonomy framework and sustainable finance standards and labels to recognise transition efforts. It stresses the importance of inclusion, to support SMEs, individuals and the real economy on the path to sustainability. It does this by providing the right tools and incentives to access transition finance, and also by exploring how to exploit the opportunities digital technologies offer for sustainable finance. It also highlights the necessity for the financial system to become more resilient to the risks posed by climate change and environmental degradation – and the steps needed to achieve this. Finally, the strategy presents the Commission’s international approach, including work on global convergence on standard setting, such as on taxonomy and disclosures.
Commission expert groups on sustainable finance
Platform on sustainable finance
Article 20 of the Taxonomy Regulation creates a ‘Platform on sustainable finance’. The platform is an advisory body composed of experts from the private and public sector. This group of experts advises the Commission on the technical screening criteria for the EU Taxonomy, the further development of the EU1NBSP.taxonomy and sustainable finance more broadly. In addition, the platform monitors and reports on capital flows towards sustainable investments.
On 12 July 2021, the Platform will publish its first draft recommendations on social taxonomy and a draft proposal for an extended taxonomy to support economic transition. The Platform gathered stakeholder feedback on both drafts from 12 July to 6 September 2021 at 12:00 CEST (midday), after the original deadline of 27 August was extended.
Technical expert group on sustainable finance (TEG)
The Commission set up a technical expert group on sustainable finance (TEG). The group’s role was to assist the Commission, notably in the development of a unified classification system for sustainable economic activities, an EU green bond standard, methodologies for low-carbon indices, and metrics for climate-related disclosure.
The TEG began work in July 2018 and its mandate was extended until 30 September 2020. Its 35 members from civil society, academia, business and the finance sector, as well as additional members and observers from EU and international public bodies, worked both through formal plenaries and sub group meetings for each work stream. To ensure transparency, the Commission organised outreaches in 2018 and 2019. Read the outreach plans for each subgroup here.
High-level expert group on sustainable finance
The HLEG comprised 20 senior experts from civil society, the finance sector, academia and observers from European and international institutions. Its role was to provide advice to the Commission on how to
- steer the flow of public and private capital towards sustainable investments
- identify the steps that financial institutions and supervisors should take to protect the stability of the financial system from risks related to the environment
- deploy these policies on a pan-European scale
The activity reports and meeting minutes of the HLEG are available on the European Commission register of commission expert groups and similar entities.
Member States expert group on sustainable finance
The Member States expert group (MSEG) on sustainable finance was created in April 2018, as part of the European Commission’s action plan on financing sustainable growth. The MSEG gathers financial market and environmental experts from Member States to allow effective coordination of sustainable finance initiatives at European and national level, and to assist the European Commission in implementing EU legislation and policies related to sustainable finance.
In the context of the EU Taxonomy Regulation (Regulation (EU) 2020/852), the MSEG has been given a distinct advisory role with respect to the EU Taxonomy.
Further information on the MSEG is available on the European Commission Register of Commission Expert Groups and similar entities.
International platform on sustainable finance
On the margins of the International Monetary Fund (IMF)/World Bank annual meetings in Washington DC on 18 October 2019, the EU – together with relevant authorities from Argentina, Canada, Chile, China, India, Kenya and Morocco – launched the International platform on sustainable finance (IPSF). Since then, more countries have joined the platform..
The ultimate objective of the IPSF is to help get more private capital being invested in environmentally sustainable investments. The IPSF is a forum designed to strengthen international cooperation and, where appropriate, coordination when it comes to approaches taken and initiatives launched for capital markets (such as taxonomies, disclosures, standards and labels). These sorts of initiatives are vital for private investors who want to be able to identify environmentally sustainable investment opportunities globally.