'Sustainable finance' generally refers to the process of taking due account of environmental and social considerations when making investment decisions, leading to increased investment in longer-term and sustainable activities.
More specifically, 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 considerations may refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities.
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.
All three components – environmental, social and governance (ESG) – are integral parts of sustainable economic development and finance.
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 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.
EU and global commitments
The European Union is strongly supporting the transition to a low-carbon, more resource-efficient and sustainable economy and it 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.
To achieve the EU's 2030 targets agreed in Paris, including a 40% cut in greenhouse gas emissions, we have to fill an investment gap estimated at 180 billion EUR per year.
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
On 21 March 2019 the European Commission organised its second high-level conference on sustainable finance. The event was set to encourage a global approach to sustainable finance and provide the opportunity to discuss ways to channel private capital towards sustainable projects in a coherent manner.
On 11 December 2019, the Commission presented the European Green Deal, a growth strategy aiming to make Europe the first first climate neutral continent by 2050.
As part of the Green Deal, on 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 enable a framework to facilitate public and private investments needed for the transition to a climate-neutral, green, competitive and inclusive economy.
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. The group was mandated 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
Commission action plan on sustainable finance
The action plan sets out a comprehensive strategy to further connect finance with sustainability. Its key actions include
- establishing a clear and detailed EU classification system – or taxonomy – for sustainable activities. This will create a common language for all actors in the financial system
- establishing EU labels for green financial products. This will help investors to easily identify products that comply with green or low-carbon criteria
- introducing measures to clarify asset managers' and institutional investors' duties regarding sustainability
- strengthening the transparency of companies on their environmental, social and governance (ESG) policies. The Commission will evaluate the current reporting requirements for issuers to make sure they provide the right information to investors
- introducing a 'green supporting factor' in the EU prudential rules for banks and insurance companies. This means incorporating climate risks into banks' risk management policies and supporting financial institutions that contribute to fund sustainable projects
To discuss its action plan, the Commission organised a high level conference on 22 March 2018.
Implementing the action plan
In May 2018, the Commission adopted a package of measures implementing several key actions announced in its action plan on sustainable finance. The package includes:
- A proposal for a regulation on the establishment of a framework to facilitate sustainable investment. This regulation establishes the conditions and the framework to gradually create a unified classification system ('taxonomy') on what can be considered an environmentally sustainable economic activity. This is a first and essential step in the efforts to channel investments into sustainable activities.
- A proposal for a regulation on disclosures relating to sustainable investments and sustainability risks and amending Directive (EU)2016/2341. This regulation will introduce disclosure obligations on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors into their risk management processes. Delegated acts will further specify requirements on integrating ESG factors into investment decisions, which is part of institutional investors' and asset managers' duties towards investors and beneficiaries.
- A proposal for a regulation amending the benchmark regulation. The proposed amendment will create a new category of benchmarks comprising low-carbon and positive carbon impact benchmarks, which will provide investors with better information on the carbon footprint of their investments.
In addition, from 24 May to 21 June 2018, the Commission has been seeking feedback on amendments to delegated acts under the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive to include ESG considerations into the advice that investment firms and insurance distributors offer to individual clients.
The Commission intends to clarify how asset managers, insurance companies, and investment or insurance advisors should integrate sustainability risks and, where relevant, other sustainability factors in the areas of organisational requirements, operating conditions, risk management and target market assessment. It will do it either by amending existing delegated acts under the UCITS Directive 2009/65/EC, the AIFM Directive 2011/61/EU, the MiFID II Directive 2014/65/EU, the Solvency II Directive 2009/138/EC and the IDD Directive 2016/97, or by adopting new delegated acts under the same Directives. Directorate-General for Financial Stability, Financial Services and Capital Markets Union sent a formal request to EIOPA and ESMA for technical advices in this respect.
On 28 September 2018, the Commission requested EIOPA for an opinion on sustainability within Solvency II, in particular relating to those aspects that concern climate change mitigation.
On 1 February 2019 the Commission requested advice from ESMA, EBA and EIOPA on undue short-term pressure from the financial sector on corporations. This Call for advice is a part of action 10 from the action plan on financing sustainable growth that aims at fostering sustainable corporate governance and attenuating short-termism in capital markets.
On 18 April 2019, the European Parliament endorsed the legislation setting the building blocks of a capital markets union, including the regulation on disclosures relating to sustainable investments and sustainability risks.
Technical expert group on sustainable finance (TEG)
The Commission set up a technical expert group on sustainable finance (TEG) to assist it 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 has been extended until 30 September 2020 in order to conclude technical work in February 2020 and provide further advice to the Commission before the end of its mandate. 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 work 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.
International platform on sustainable finance
On 18 October 2019, on the margins of the International Monetary Fund (IMF)/World Bank annual meetings in Washington DC, the European Union, represented by Valdis Dombrovskis, Vice-President for the euro and social dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, together with relevant authorities from Argentina, Canada, Chile, China, India, Kenya and Morocco, launched the International platform on sustainable finance (IPSF) in the presence of IMF Managing Director Kristalina Georgieva.
Climate change poses global challenges. Massive investments will be needed to transit to a low carbon economy. Public funding is vital for the transition but it will not be enough. A substantial part of the financial flows will have to come from the private sector.
The ultimate objective of the IPSF is to scale up the mobilisation of private capital towards environmentally sustainable investments. The IPSF is a forum to strengthen international cooperation and, where appropriate, coordination on approaches and initiatives for the capital markets (such as taxonomies, disclosures, standards and labels), that are fundamental for private investors to identify and seize environmentally sustainable investment opportunities globally.