Why EU Financial Services Will Be Banking on Sustainability

21 January 2020 11:22am

ESG Financial Services_Blog

Despite growing awareness of the need to combat climate change on a global level, political decision makers are not always in accord. While the U.S. has officially withdrawn from the 2016 Paris Agreement—a unilaterally-agreed framework to mitigate global warming—other governmental representatives and bodies have introduced several measures complementing the Paris agreement and supporting the use of Environmental, Social and Governance (ESG) standards across different industries and sectors.

One of the sectors heavily impacted by the Paris Climate Agreement is the financial services industry. With the aim to support the implementation of the targets agreed upon in Paris and within the framework of the United Nations Sustainable Development Goals (SDG), the European Commission has introduced a new sustainable finance regulation in 2018. This regulation, the Action Plan: Financing Sustainable Growth will come into effect in July 2020 and includes a number of extensive policies addressed to the financial services industry.

A sustainable financial framework

The European Action Plan primarily establishes a framework of incentives for other industries which are dependent on the capital of the financial services sector by defining and establishing common principles of sustainable economic activity.  Through this regulatory proposal the European Commission further strengthens its own role as a more active regulator and recognizes that sustainability and the transition to a more resource-efficient, low-carbon and circular economy is the key to ensure the long-term competitiveness of the EU economy.

While enabling new investment and employment opportunities the innovative legislative act will at the same time advance the EU's efforts for sustainable development in particular concerning the financial system. Here, the financial services industry is set to play a pivotal role towards a more sustainable economy, by not only redirecting private capital to more sustainable investments but also by encouraging long-term financial stability by incorporating environmental, social and corporate governance (ESG).

The road to a sustainable financial services industry

In order to succeed in the sustainable transformation and reorientation of the EU economy the imminent action plan contains 10 concrete regulatory objectives for the financial services industry.

1. Establish an EU classification system for sustainable activities

The European Commission aims at developing a comprehensive and progressive legal overview for environmentally and socially sustainable activities and climate change in areas such as standards, labels and sustainability benchmarks.

2. Creating labels and standards for green financial products

Preparing the introduction of a EU Ecolabel for certain financial products and complementing the sustainable classification system.

3. Encouraging sustainable investment projects

Improve the impact and efficiency of instruments aimed at supporting sustainable investment in the EU and beyond.

4. Incorporating sustainability into financial assessments

The EU intends to strengthen the significance of sustainability factors when providing financial advice to corporations and other private entities.

5. Developing sustainability benchmarks

By establishing a set point of references the European Commission wants to enable civil society to take part in the assessment of sustainable efforts.

6. Improve the integration of sustainability in ratings

Assess how and to what extent EGS considerations can be taken into account within financial ratings and market research services.

7. Clarify the role of investors and asset managers

The EU will encourage both investors and asset managers to not only integrate sustainability considerations into their decision-making process but to further support transparency throughout their value chain.

8. Require the inclusion of sustainability factors in corporate risk management policies

Evaluate the impact of regulating the incorporation of risks in connection with environmental and other sustainability factors through existing EU regulations and directives.

9. Promote sustainability reporting and accounting in the financial services industry

The European Commission aims at providing a comprehensive roadmap for companies to disclose climate-related information and promote best-practices on sustainable reporting.

10. Champion ESG and mitigate short-termism in the financial services industry

In order to promote more contributive sustainable investments from corporations the EU will assist them in developing and fully disclosing a comprehensive sustainability strategy and appropriate due diligence throughout their supply chain and furthermore support corporate efforts to mitigate short-term decision making.

These ten points accentuate the gravity of the European Union’s undertaking in order to facilitate the implementation of the Sustainable Development Goals and the Paris Climate Accord. What the European Commission hopes to achieve within the regulatory framework of this imminent legislation is—above all—a closing of ranks between governments, corporations and last, but not least, civil society. The global financial sector will play a key role in progressing a sustainable agenda through their capital potential to mobilise in favour of long-term change for a better, brighter and more sustainable future for all.

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