Overview
Sustainable finance is the provision of finance to investments taking into account environmental, social and governance considerations.
Sustainable finance includes a strong green finance component that aims to support economic growth while
- reducing pressures on the environment
- addressing green-house gas emissions and tackling pollution
- minimising waste and improving efficiency in the use of natural resources
It also encompasses increasing awareness of and transparency on
- the risks which may have an impact on the sustainability of the financial system
- the need for financial and corporate actors to mitigate those risks through appropriate governance
EU and global committments
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 established with the adoption of the UN 2030 Agenda and Sustainable Development Goals and the Paris Climate Agreement. The Paris 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
Implementing the action plan: Commission legislative proposals
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 in their risk processes. Requirements to integrate ESG factors in investment decision-making processes, as part of their duties towards investors and beneficiaries, will be further specified through delegated acts.
- 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, 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.
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 will operate until June 2019, with a possible extension until end-2019. 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 will organise targeted and open consultation in 2018 and 2019. Read the consultation plans for each subgroup here. They will be updated on a regular basis.
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.
Commission action plan on sustainable finance
The recommendations of the High-Level Expert Group on Sustainable Finance form the basis of the action plan on sustainable finance adopted by the Commission in March 2018.
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.
High-Level Expert Group on Sustainable Finance
As announced in its communication on Capital Markets Union – Accelerating reformpost the European Commission established a High-Level Expert Group on Sustainable Finance (HLEG) in December 2016.
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
The HLEG published an interim report in July 2017 and delivered its final report in January 2018.