This week, two new regulations within the area of Sustainable Finance will be signed by the European Council. This is a historical turning point of the EU and a clear dedication that they, as a union, will follow the goals set by the Paris Agreement and UNs Sustainable Development Goals (SDG).
The signing of the new regulations and their subsequent publication in the Official Journal can also be seen as the starting point for EU’s action plan on sustainable finance. The two proposals signed are;
- Sustainability-related disclosures in the financial services sector
- EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks (amending EU 2016/1011)
Both proposals are a part of EU’s action plan on Sustainable Finance. This action plan also includes a proposal for a taxonomy regulation – a classification system determining “what’s green” on the European market, and a non-legislative EU Green Bond Standard which are not signed this week.
The absence seen in today’s market regarding harmonised rules for sustainable finance and united definitions on “what’s green” has been one of the driving factors behind EU’s action plan on sustainable finance. The aim of the action plan is simple but comprehensive; EU wants to reorient the market’s capital flows towards sustainable investments in order to achieve sustainable growth within the union.
The main objectives with the regulation on sustainability-related disclosures are to increase the transparency and to promote sustainable investment and environmental and social characteristics. Furthermore, the aim of the new regulation is to reduce information asymmetries in principal-agent relationships with regards to the integration of sustainability risks and the consideration of adverse sustainability impacts.
Sustainability risks include environmental, social and governance (ESG) risks that can cause a negative material impact on the value of the investment. The regulation also seeks to achieve more transparency in how financial advisers integrate sustainability risks in their investment decisions and advice. All this information needs to be published on the company’s website.
The regulation regarding climate transition benchmarks has been drafted in order for EU to achieve the SDGs and the goals set in the Paris Agreement, by channelling capital flows toward sustainable investments. Once again, a key aspect of the regulation is to increase transparency, and by doing so help prevent “greenwashing”. The existing divergent benchmarks do not make it clear to the users if the indices are aligned to the objectives of the Paris Agreement and SDGs, or merely a benchmark that aims to lower the carbon footprint of an investment portfolio. EU, therefore, has seen a need to lay down minimum requirements for EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks at a union level. An important section in this regulation is that these benchmarks should not significantly harm other ESG-objectives.
We expect more action in the area of Sustainable Finance in the near future. The two other proposals in EU’s action plan will soon follow. The European Commission will after the new year’s look over the proposal for the Taxonomy Regulation, and the same is expected for the voluntary, non-legislative EU Green Bond Standard. It is therefore imperative for companies to get on top of sustainability-related questions and follow in the direction of a green movement set and supported by a 500 million people union.
FCG believes that financial institution will have a key role in solving the world’s environmental and social challenges. Companies that are acting as a catalyst to facilitate early adoption of low-carbon and resource-efficient alternatives will allow themselves to establish first move advantage. New thinking, innovations and financial assistance needed as well as responsible credit granting.