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What is sustainable finance?
- Sustainable finance refers to the practice of investing money in a way that supports environmental and social goals, as well as financial returns. It covers various instruments and strategies, such as green bonds, ESG funds, impact investing, and corporate engagement. Sustainable finance is gaining momentum as a way to align capital allocation with the UN Sustainable Development Goals and the Paris Agreement on climate change.
- Sustainable finance is a term that encompasses a range of financial activities aimed at promoting sustainable development. This includes not only investing in renewable energy, circular economy, and social enterprises, but also integrating environmental, social, and governance factors into investment decisions, engaging with companies to improve their sustainability performance, and measuring and reporting on the impact of investments. Sustainable finance seeks to generate long-term value for investors, society, and the planet.
- Sustainable finance is a new paradigm that challenges the traditional view that profit and impact are trade-offs. By applying a holistic approach to risk and return, sustainable finance recognizes that environmental and social issues can affect financial performance and vice versa. Therefore, sustainable finance seeks to allocate capital to projects and companies that have positive externalities, mitigate risks, and foster stakeholder trust. Sustainable finance also seeks to democratize access to finance, promote transparency and accountability, and contribute to a more equitable and resilient financial system.
The Importance of Sustainable Finance
The European green deal and the Paris climate agreement have set the stage for the need to build a financial system that supports sustainable growth.
Sustainable finance plays a crucial role in achieving these policy objectives and the EU’s international commitments on climate and sustainability goals.
It mobilizes private investments into a climate-neutral, resilient, resource-efficient, and equitable economy as a complement to public funds. Sustainable finance is an essential tool in ensuring that investments support a sustainable recovery from the COVID-19 pandemic and a resilient economy.
The European Union has been a staunch supporter of transitioning to a low-carbon, more resource-efficient, and sustainable economy.
In 2015, the UN 2030 agenda and sustainable development goals were adopted, followed by the Paris climate agreement, which committed to aligning financial flows with low-carbon and climate-resilient development pathways.
The European green deal, presented on December 11, 2019, is a growth strategy that aims to make Europe the first climate-neutral continent by 2050.
It includes the European green deal investment plan, which will mobilize at least €1 trillion of sustainable investments over the next decade. The plan will create the right environment or “enabling framework” to stimulate public and private investments necessary for a climate-neutral, competitive, green, and inclusive economy.
The 2030 climate target plan, presented on September 17, 2020, increased the EU’s emissions reduction target to 55% by 2030 compared to 1990 levels.
To meet these targets, the EU needs to invest approximately €350 billion more annually from 2021-2030 than it did in the previous decade.
The European Fund for Strategic Investments and other initiatives have already provided impetus to attract the required investments.
However, the scale of the investment challenge is beyond the public sector’s capacity, and the financial sector must play a crucial role in meeting these goals. The financial sector can:
- Re-orient investments towards sustainable technologies and businesses.
- Finance growth sustainably over the long term.
- Contribute to the creation of a low-carbon, climate-resilient, and circular economy.
Since 2018, the Commission has been developing a comprehensive policy agenda on sustainable finance, which includes the action plan on financing sustainable growth and a renewed sustainable finance strategy within the framework of the European green deal and the new strategy for financing the transition to a sustainable economy.
Additionally, the Commission coordinates international efforts through the International Platform on Sustainable Finance.
Implementation of Sustainable Finance Strategy and Action Plan on Financing Sustainable Growth
The Commission has announced a renewed sustainable finance strategy as part of the European Green Deal.
On July 6, 2021, the Commission published its “strategy for financing the transition to a sustainable economy,” which builds on previous initiatives, reports, and consultations.
The new strategy proposes actions in various areas, including extending the EU taxonomy framework and sustainable finance standards to recognize transition efforts, providing tools and incentives for SMEs and individuals to access transition finance, exploring opportunities for digital technologies in sustainable finance, increasing the resilience of the financial system to climate change and environmental degradation, and presenting the Commission’s international approach towards global convergence on standard setting.
The strategy emphasizes the importance of inclusion, especially for supporting SMEs and the real economy on the path to sustainability.
The expert groups established by the Commission to address sustainable finance
The Taxonomy Regulation includes Article 20, which establishes a ‘Platform on sustainable finance.
This group comprises public and private sector experts who advise the Commission on technical screening criteria for the EU Taxonomy, as well as on the development of the EU1NBSP.
taxonomy and sustainable finance as a whole.
The platform is also responsible for monitoring and reporting on capital flows towards sustainable investments.
The Platform is set to release its initial draft recommendations on social taxonomy and a draft proposal for an expanded taxonomy to support economic transition on 12 July 2021. Stakeholder feedback on both drafts was collected between 12 July and 6 September 2021 at 12:00 CEST (midday), after the original deadline of 27 August was extended.
Exploring Sustainable Finance with the Technical Expert Group (TEG)
The Technical Expert Group on Sustainable Finance (TEG) was established by the Commission to aid in the development of various sustainable finance initiatives.
These included a standardized classification system for sustainable economic activities, an EU green bond standard, low-carbon index methodologies, and climate-related disclosure metrics.
With 35 members from various sectors such as civil society, academia, business, and finance, the TEG began its work in July 2018 and continued until 30 September 2020, with additional members and observers from EU and international public bodies.
The group held formal plenary and sub-group meetings for each workstream, and the Commission organized outreaches in 2018 and 2019 to ensure transparency. See the outreach plans for each sub-group here.
Expert Group on Sustainable Finance at a High Level
The European Commission established a High-level Expert Group on Sustainable Finance (HLEG) in December 2016, in line with its communication on Capital Markets Union – Accelerating Reform.
The HLEG, consisting of 20 senior experts from various fields, was tasked with advising the Commission on steering public and private capital towards sustainable investments, identifying measures for financial institutions and supervisors to manage risks related to the environment and implementing these policies across Europe.
In July 2017, the HLEG released an interim report, followed by the final report in January 2018.
The activity reports and meeting minutes of the HLEG are accessible on the European Commission register of commission expert groups and similar entities.
The expert group on sustainable finance for Member States
The European Commission established the Member States expert group on sustainable finance (MSEG) in April 2018, as part of its action plan on financing sustainable growth. Comprising of financial market and environmental experts from Member States, the MSEG facilitates effective coordination of sustainable finance initiatives at the European and national level, and advises the European Commission in implementing EU legislation and policies related to sustainable finance.
With respect to the EU Taxonomy Regulation, the MSEG has been assigned a specific advisory role.
To find more information about the MSEG, visit the European Commission Register of Commission Expert Groups and similar entities.
Sustainable finance international platform
At the annual meetings of the International Monetary Fund (IMF) and the World Bank in Washington DC on 18 October 2019, the EU and relevant authorities from Argentina, Canada, Chile, China, India, Kenya, and Morocco launched the International Platform on Sustainable Finance (IPSF).
More countries have since joined the platform.
The IPSF aims to increase private capital investment in environmentally sustainable investments.
It is a forum that promotes international cooperation and coordination on capital market approaches, initiatives, taxonomies, disclosures, standards, and labels.
These initiatives are essential for private investors seeking environmentally sustainable investment opportunities worldwide.
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