Paris Agreement – “holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels”.
While this is not the only goal of sustainable development it is certainly a priority given the urgency of the situation. The European Commission has developed a strategy and roadmap for improving the communication and understanding of the sustainability implications for finance and investment.
Steps on the roadmap include:
- Establishing a common language for sustainable finance, i.e. what is sustainable and where can sustainable investment make the biggest impact?
- Creating EU labels for green financial products on the basis of this EU classification system
- Clarifying the duty of asset managers and institutional investors to take sustainability into account in the investment process and enhance disclosure requirements.
- Requiring insurance and investment firms to advise clients on the basis of their preferences on sustainability.
- Incorporating sustainability in setting capital requirements for banks (the so-called green supporting factor), while ensuring that financial stability is safeguarded.
- Enhancing transparency in corporate reporting: the Commission proposes to revise the guidelines on non-financial information to further align them with the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD).
In December 2019, new regulation from the EU on Sustainability-related Disclosures in the financial services sector (the SFDR) entered into force and become applicable from March 2021. This has been further supplemented by the Taxonomy Regulation which relates to the language used to describe sustainable financial investment and became applicable in January 2022.
There is some concern in the financial markets and in the industry generally that the trend towards investment in the demonstrably sustainable industries may have a constricting effect on the flow of investment to more traditional energy-consuming companies. This may seem like a good idea, but these companies include many which produce products that will not go away, and thus they will need investment to allow them to transition to more sustainable methods of production.
The possibly unpopular conclusion of this blog is that consideration should be given to encouraging investment where it can be shown to improve sustainability in the future rather than only promoting investment in already sustainable businesses. This is based on the proviso that the business is already implementing available sustainability measures. It is unlikely that major technological advances will be made without investment.
Sustainable finance: Commission’s Action Plan for a greener and cleaner economy European Commission 2018
What the EU’s Sustainable Financial Disclosure Regulation (SFDR) means for PLCs – Davy.ie January 2022
Sustainable Finance Package European Commission Communication June 2021