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Overview of sustainable finance

What is sustainable finance

Sustainable finance generally refers to the process of taking due account of environmental, social and governance (ESG) considerations when making investment decisions in the financial sector, leading to increased longer-term investments into sustainable economic activities and projects. More specifically, environmental considerations may refer to climate change mitigation and adaptation, as well as the environment more broadly, such as the preservation of biodiversity, pollution prevention and circular economy. Social considerations may refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities, as well as human rights issues.

The governance of public and private institutions, including management structures, employee relations and executive remuneration, plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.

In the EU's policy context, sustainable finance is understood as finance to support economic growth while reducing pressures on the environment and taking into account social and governance aspects. Sustainable finance also encompasses transparency on risks related to ESG factors that may impact the financial system, and the mitigation of such risks through the appropriate governance of financial and corporate actors.

Sustainable finance at EU level aims at supporting the delivery on the objectives of the European Green Deal by channelling private investment into the transition to a climate-neutral, climate-resilient, resource-efficient and just economy, as a complement to public money.

Why is sustainable finance important

Sustainable Finance has a key role to play in mobilising the necessary capital to deliver on the policy objectives under the European Green Deal as well as the EU’s international commitments on climate and sustainability objectives. It helps ensure that investments support a resilient economy and a sustainable recovery from the impacts of the COVID-19 pandemic.

The European Union is strongly supporting the transition to a low-carbon, more resource-efficient and sustainable economy and it has been at the forefront of efforts to build a financial system that supports sustainable growth.

In 2015, landmark international agreements were concluded with the adoption of the UN 2030 agenda and sustainable development goals and the Paris climate agreement. The Paris climate agreement, in particular, includes the commitment to align financial flows with a pathway towards low-carbon and climate-resilient development.

On 11 December 2019, the Commission presented the European Green Deal, a growth strategy aiming to make Europe the first climate neutral continent by 2050.

As part of the Green Deal, the Commission presented on 14 January 2020 the European green deal investment plan, which will mobilise at least €1 trillion of sustainable investments over the next decade. It will enable a framework to facilitate public and private investments needed for the transition to a climate-neutral, green, competitive and inclusive economy.

Reaching the current 2030 climate and energy targets alone would already require additional investments of approximately €260 billion a year by 2030. The EU is already providing impetus to help attract the required investments with the European Fund for Strategic Investments and other initiatives. However, the scale of the investment challenge is beyond the capacity of the public sector alone. The financial sector has a key role to play in reaching those goals. It can

  • re-orient investments towards more sustainable technologies and businesses

  • finance growth in a sustainable manner over the long-term

  • contribute to the creation of a low-carbon, climate resilient and circular economy.

To this end, the Commission has developed a comprehensive policy agenda on sustainable finance since 2018, comprising the action plan on financing sustainable growth and the development of a renewed sustainable finance strategy in the framework of the European Green Deal. The Commission is also coordinating international efforts through its International platform on sustainable finance.

Next steps

Keep up-to-date: check the next steps for sustainable finance

  • October 2020 Publication of the draft delegated regulation on climate change mitigation and adaptation under the Taxonomy Regulation for feedback.

  • 31 December 2020 Adoption of the delegated act on climate change mitigation and adaptation under the Taxonomy Regulation

Renewed sustainable finance strategy and implementation of the action plan on financing sustainable growth

In the framework of the European Green Deal, the Commission announced a renewed sustainable finance strategy, which aims to provide the policy tools to ensure that financial system genuinely supports the transition of businesses towards sustainability in a context of recovery from the impact of the COVID-19 outbreak. The renewed strategy will contribute to the objectives of the European green deal investment plan, in particular to creating an enabling framework for private investors and the public sector to facilitate sustainable investments. It will build on previous initiatives and reports, such as the Commission’s 2018 action plan on financing sustainable growth and the reports of the Technical Expert Group on Sustainable Finance (TEG).

On 8 April 2020 the Commission launched a consultation on its sustainable finance strategy, available for 14 weeks (until 15 July 2020). All citizens, public authorities and private organisations within the EU and beyond were invited to give their views and opinions.

Meanwhile, the European Commission is working towards implementing the proposed action points of its action plan on sustainable finance.

Commission expert groups on sustainable finance

High-level expert group on sustainable finance

As announced in its communication on Capital Markets Union – Accelerating reform, the European Commission established a High-level expert group on sustainable finance (HLEG) in December 2016.

The HLEG comprised 20 senior experts from civil society, the finance sector, academia and observers from European and international institutions. The group was mandated to provide advice to the Commission on how to

  • steer the flow of public and private capital towards sustainable investments

  • identify the steps that financial institutions and supervisors should take to protect the stability of the financial system from risks related to the environment

  • deploy these policies on a pan-European scale

The HLEG published an interim report in July 2017 and delivered its final report in January 2018.

The activity reports and meeting minutes of the HLEG are available on the European Commission register of commission expert groups and similar entities.

Technical expert group on sustainable finance (TEG)

The Commission set up a technical expert group on sustainable finance (TEG) to assist it notably in the development of a unified classification system for sustainable economic activities, an EU green bond standard, methodologies for low-carbon indices, and metrics for climate-related disclosure.

The TEG began work in July 2018 and its mandate has been extended until 30 September 2020 in order to conclude technical work in February 2020 and provide further advice to the Commission before the end of its mandate. Its 35 members from civil society, academia, business and the finance sector, as well as additional members and observers from EU and international public bodies work both through formal plenaries and sub group meetings for each work stream. To ensure transparency, the Commission organised outreaches in 2018 and 2019. Read the outreach plans for each subgroup here.

Platform on sustainable finance

Article 20 of the Taxonomy Regulation creates a ‘Platform on sustainable finance’. The platform will be an advisory body composed of experts from the private and public sector. This group of experts will advise the Commission on the technical screening criteria for the EU Taxonomy, the further development of the EU1NBSP.taxonomy and sustainable finance more broadly. In addition, the platform will monitor and report on capital flows towards sustainable investments.

Following the adoption of the Taxonomy Regulation by the European Parliament and the Council, the Commission launched a call for applications for the selection of the members of the Platform on sustainable finance on 18 June 2020. The call for applications will be open for a period of 4 weeks. The deadline for applications is 16 July 2020.

Member States expert group on sustainable finance

The Member States expert group (MSEG) on sustainable finance was created in April 2018, as part of the European Commission’s action plan on financing sustainable growth. The MSEG gathers financial market and environmental experts from Member States to allow effective coordination of sustainable finance initiatives at European and national level, and to assist the European Commission in implementing EU legislation and policies related to sustainable finance.

In the context of the EU Taxonomy Regulation (Regulation (EU) 2020/852), the MSEG has obtained a distinct advisory role in respect to the EU Taxonomy.

Further information on the MSEG is available on the European Commission Register of Commission Expert Groups and similar entities.

International platform on sustainable finance

On the margins of the International Monetary Fund (IMF)/World Bank annual meetings in Washington DC on 18 October 2019, the European Union launched together with relevant authorities from Argentina, Canada, Chile, China, India, Kenya and Morocco the International platform on sustainable finance (IPSF). More countries joined the platform since its creation.

The ultimate objective of the IPSF is to help scale up the mobilisation of private capital towards environmentally sustainable investments. The IPSF is a forum to strengthen international cooperation and, where appropriate, coordination on approaches and initiatives for the capital markets (such as taxonomies, disclosures, standards and labels), that are fundamental for private investors to identify and seize environmentally sustainable investment opportunities globally.

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