In light of the UN SDGs, the Paris Agreement on climate change and the EU’s climate, energy, and environmental policy framework, the current financial system needs to be better aligned with EU policies and foster investments that support the transition to a low-carbon, climate-resilient, more resource efficient and circular economy, while avoiding further degradation of our natural capital and preserving financial stability. An enormous investment gap needs to be filled, which is beyond the capacity of the public sector alone. The financial sector has a key role to play.
Creating an EU framework which puts Environmental, Social and Governance (ESG) considerations at the heart of the financial system to support the transformation of Europe's economy into a greener, more resilient and circular system.
In March 2018, the Commission launched its Action Plan on Financing Sustainable Growth. The Action Plan has three objectives:
• reorient capital flows towards sustainable investment, in order to achieve sustainable and inclusive growth
• manage financial risks stemming from climate change, environmental degradation and social issues
• foster transparency and long-termism in financial and economic activity
Financial world at large: asset management, banking, capital markets, credit ratings, financial centres, insurance firms, investment consultants, retail investors, pension funds, stock exchanges; industry, NGOs, other EU institutions, EU Member States. The Commission has been advised, inter alia, by an external High Level Expert Group, by a Technical Expert Group, and has held and will be holding several surveys and public consultations. The implementation of the Action Plan has been a shared effort among Commission’s departments, especially by the Directorate General for Financial Stability, Financial Services and Capital Markets Union, DG Environment, DG Climate Action and DG Energy.
Following the adoption of the Action Plan on Financing Sustainable Growth in March 2018, the Commission adopted in May 2018 a package of measures implementing several key actions announced in its action plan on sustainable finance. The package includes three key legislative proposals:
• 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.
• 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, the Commission proposed 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.
Non-legislative measures are also included in the sustainable finance initiative, inter alia, work towards developing an EU Green Bond Standard, metrics allowing improving disclosure on climate-related information, and an EU Ecolabel for green financial products.
The EU financial sector has the potential to multiply sustainable finance and become a global leader in this area. This should also have a positive effect on economic growth and job creation.
More investments will be channelled into sustainable activities thanks to new rules that define the criteria to determine whether an economic activity is environmentally-sustainable. This harmonised EU-wide classification system – or ‘taxonomy' - will particularly help investors who often do not have enough information about what is green and what is not. All financial entities that manage investments on behalf of their clients or beneficiaries will now have to inform them about how their activities are impacting the planet or their local environment.
The initiative on sustainable finance started within the context of the EU’s Capital Markets Union initiative, and is supported at the highest level within the Commission. This made it possible to devote the necessary human resources from several Commission Directorates-General.
The Commission’s initiative on sustainable finance has been followed with great interest in other parts of the world. It is hoped that other countries and jurisdictions will be inspired by the work done in the EU, and follow Europe's lead in this urgent matter.
In order to enhance cooperation and exploit synergies, the EU is considering establishing an international network of jurisdictions from both developed and developing countries that are committed to advancing sustainable finance.
The Sustainable Finance Action Plan described above, together with the first package of legislative and non-legislative measures that are being developed, has created an unprecedented momentum of work and discussion on sustainable finance in the EU, with a level of ambition that, to our knowledge, is unmatched elsewhere, and which has the potential to deliver financial reform producing systemic change.
For an overview of the Commission’s initiative on sustainable finance and links to the main documents, see https://ec.europa.eu/info/business-economy-euro/banking-and-finance/sustainable-finance_en