SUSTAINABLE FINANCE Integrating sustainability in all economic sectors

It is estimated that in order to achieve carbon neutrality and fulfil the commitments made under the Paris Agreement, the EU will require investments of about €175-290 billion per annum in the energy, transport, construction, water and infrastructure sectors.

To address this challenge, public and private funds will have to be redirected into sustainable investments. The public-sector financing capacities being limited, the private sector will play a crucial role in generating the investment needed to bring about this transition.

To this end, the European Commission has submitted an ambitious and unique Action Plan on Financing Sustainable Growth.

Creating more opportunities for green investment and raising investor awareness about the risks associated with climate change require several legislative proposals. These proposals are designed to guarantee that financial products will be used to promote sustainable activities, and therefore be the driving force behind the transition towards a greener economy.

The cornerstone of the Action Plan and the most important legislative proposal is the Regulation on the establishment of a framework to facilitate sustainable investment which provides for the creation of an EU taxonomy. The proposal will help develop a unified EU classification system for environmentally sustainable economic activity for investment purposes. This will enable Member States to recognize the value of their investment through new labels and standards across the EU, highlighting the path for future law to best support sustainable development.

The other two actions include a proposal to introduce disclosure requirements on how institutional investors and asset managers integrate environmental, social and governance (ESG) factors into their risk processes, as well as a proposal to create low-carbon and positive emission benchmarks to provide investors with better information on the carbon footprint of their investments.

These initiatives, among others under development, demonstrate the EU’s commitment to mitigating global warming. The Action Plan marks a proactive effort to integrate climate change factors into state budgeting, public procurement and public investment management. The objective is to implement structural changes in economic, production and energy models to transform our model of growth.

The targets set out in this legislation will involve widespread restructuring and industrial change in all EU countries; it will affect all sectors as the EU develops low and zero-carbon alternatives to replace current technologies. It is imperative to strike a balance between sustainable and social development as demonstrated by the European Commission’s new political agenda. Ultimately, thegoal of sustainable finance is to continuously improve the conversion of “brown” activities into “green” ones. This is the new reality of the 21st century if we wish to achieve a world free from carbon by 2050. In this edition of The European Files, we unpack the complexities of this significant legislation to better understand the interest for all stakeholders involved in sustainable finance.

Editor-in-Chief 

Laurent ULMANN