Sustainable Finance means taking environmental, social, and governance (ESG) factors into consideration when making investment decisions in private and public financial sectors. This can lead the way to create and foster sustainable economic activities and projects and drive the transition to a more sustainable and equal economy.
For more insights into what falls under ESG, check out our previous blog post
Europe has the ambition to become the first-ever climate-neutral continent in the world by 2050, established through the 2019 EU Green Deal and in line with the EU’s endorsement of the 2015 Paris Agreement.
For its Green plan, the EU established six environmental objectives
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
The adoption of international agreements such as the UN2030 agenda, the UN Sustainable Development Goals (SDGs), and the 2015 Paris Agreement includes a commitment to align financial flows towards net zero and climate-resilient growth. Hence EU policy embeds Sustainable Finance as a means to support economic growth while simultaneously reducing pressure on the environment and factoring in social and governance concerns.
Under its 2030 climate target plan, the commission plans to reduce carbon emissions by 55% – Sustainable Finance can play a crucial role in driving the economy towards achieving this interim goal. To reach the 2030 milestone, the EU needs to invest approximately €350 billion more every year from 2021 to 2030. The European Green Deal Investment Plan involves mobilizing a minimum of €1 trillion in sustainable investments over the coming decade. The right framework is key to promoting and stimulating both private and public investment to shift towards a sustainable economy.
Formally, the European Commission established the Action Plan on Financing Sustainable Growth with the following three objectives:
- Reorienting capital flows towards a more sustainable economy
- Mainstreaming sustainability into risk management
- Fostering transparency and long-termism
This extends to transparency regarding risks associated with ESG factors that might impact the stability of our financial system.
For example, in September 2021, the European Central Bank (ECB) published its economy-wide climate stress test results. Considering three distinct climate policy scenarios, this analysis looked into the implications of climate change on firms and banks. In addition to revealing the concentration of climate risk in certain regions, the report finds that early adoption of Green policies and embracing the transition to net-zero emissions have clear advantages for companies and banks.
Moreover, the plan is accompanied by a broad set of new and enhanced regulations, including a new set of sustainable finance disclosure regulations. This includes the EU Taxonomy for Sustainable Activities, which can be used as a dictionary for economic activities and their sustainability as captured in the six environmental objectives. This dictionary is being developed by the European Commission’s Platform on Sustainable Finance, where GreenWatch’s Professor Andreas Hoepner is the only member appointed in a personal capacity, supported by GreenWatch’s Fabiola Schneider as his so-called ‘Sherpa.’
Read more about the EU Green Taxonomy and how it links to our work at GreenWatch in our next blog post.
Yet, of course, the climate crisis knows no borders, which is why the European Commission is also coordinating international efforts through its International Platform on Sustainable Finance. This multilateral forum of dialogue between policymakers in charge of developing sustainable finance regulatory measures with the goal of promoting best practices. Comparing the different initiatives allows to identify barriers and opportunities for sustainable finance while respecting national and regional contexts.