Environmental, social, and corporate governance (ESG), the EU’s action plan for sustainable finance

Our planet is facing an unprecedented climate and environmental crisis which threatens our society and way of life. The magnitude of these threats demands an urgent and substantial response from those in government, industry, and indeed the general public.

The European Green Deal aims to make Europe climate-neutral by 2050 and is therefore crucial to our transition towards sustainability. Public funding alone is insufficient to meet the demands of the transition. Mobilising private capital and the financial sector to join the fight against climate change will therefore be essential to achieving our objectives. This is why the sustainable finance agenda is at the very heart of the European Green Deal.

As the Commissioner for Financial Services, Financial Stability and Capital Markets Union, I oversee the Commission’s work on helping to ensure the necessary long-term investments into sustainable economic activities and projects.

Sustainable finance transparency

The role of the disclosures and sustainability reporting is of particular importance to mobilising investment in sustainable activities.

With the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), we have established mandatory common standards to be used by all large companies as well as by listed SMEs. This ensures that financial markets get comparable and accurate information about investee companies and allows investors to confidently compare investments. By reporting on their impact on people and planet, companies are encouraged to adopt a sustainability mindset at all levels and the long-term impact. We have all seen, time and again, that companies that embody sustainability and risk analysis in their day-to-day operations are better placed to react to challenges in the long term. This in turn will lead to a more resilient economy.

Our work on the EU Taxonomy has further set out the baseline standards for sustainable finance investments, which will allow investors to share a common definition of sustainability and direct their investments accordingly.

Strengthening ESG criteria integration in the financial sector

Although there has been significant work already done on sustainable finance there remains more to do.

I am committed to further strengthening the integration of ESG criteria in the financial sector to promote sustainability and meet the challenges of climate change.

The obligations arising from the disclosure and reporting legislation are being phased in on a gradual basis, with the reporting criteria becoming stronger and more stringent over time. The reporting requirements under the CSRD, for example, are phased in over 3 years according to different categories of company, with listed SMEs coming last and even then having a further two years during which they can chose to opt out of the requirements. This approach allows for crucial industry buy-in to the idea of ESG reporting at an early stage before the full range of criteria become enacted.

Separately, my services are also working on rules for ESG rating agencies in financial markets with a view to enhancing the transparency and reliability of these ratings.

Regulatory mechanisms

One of the European Commission’s strengths is the mixture of legal powers as well as ‘soft powers’ that are open to it when we decide to act in a certain area. In terms of the legal powers, we have adopted the reporting and disclosure legislation which I have referred to above, as well as put in place the EU Taxonomy to ensure transparency in the financial market on what is considered environmentally sustainable and thus to prevent greenwashing.

Furthermore, we have soft powers such as using our position as a global leader in the area of sustainable finance to set the standards on investment products that incorporate sustainability, such as with the European green bond voluntary standard. These bonds have specific rules governing where their funds may be allocated in order to ensure that they too align with our EU Taxonomy.

The EU as a global leader

I firmly believe that the EU is a leader in the area of sustainable finance, but I also want to ensure that we continue to lead the way on this matter.

We have gained valuable experience and insights through our work on sustainable finance to date, this know-how we can share with others and help encourage other countries to join us. We can further use this experience to work with international bodies such as the International Sustainability Standards Board (ISSB).

By cooperating at a global level to standardise the ESG definitions and requirements, we can ensure transparency in sustainable finance around the world.

The EU is doing a lot in this area – but of course we cannot do it alone, and we greatly value our work with our global partners. We cannot reach net-zero without working together.