A high pace of sustainable finance regulation in the EU

As a response to climate change and environmental degradation, the European Commission adopted the European Green Deal in December 2019 as Europe’s new growth strategy. The Green Deal has the ambition to transform Europe into a modern, resource-efficient and competitive economy in which there are no net emissions of greenhouse gas emissions by 2050, economic growth is decoupled from resource use, and no person and no place is left behind. To enable this strategy, the European Commission early 2020 presented the investment pillar of the Green Deal: the European Green Deal Investment Plan will mobilize at least € 1 trillion of sustainable investments over the next decade.

Since that moment, several regulations have come into effect in order to redirect financial flows towards sustainable investments. The EU Taxonomy for sustainable activities is one of the most important reforms in this regard and will serve to establish a common understanding of green economic activities, prevent greenwashing and help shift investments where they are the most needed. The EU Taxonomy outlines six environmental objectives, on which different regulations build.

Another important reform came with the Climate Benchmarks Regulation, that has the objective to increase the transparency and the disclosure of sustainability information on financial products, thereby supporting investors to pursue low-carbon investment strategies.

More recently, in March 2021, the Sustainable Finance Disclosure Regulation (SFDR) came into effect. This marked the beginning of a series of requirements for financial market participants and financial advisers in the European Union to discourage greenwashing and promote responsible and sustainable investments. The SFDR has disclosure implications both at the entity level and at the product level, and these will serve to assess the effects on sustainability factors that an investment might have.

A brief overview of key sustainable finance regulation in Europe can be found in the downloadable document.

Implications for the real economy

Of course, the ambition is not only European. In March 2021, the World Business Council for Sustainable Development (WBCSD) communicated its Vision 2050: “Time to Transform”, which maps how businesses can lead the transformation the world needs. The vision is to have 9+ billion people living well within planetary boundaries. Here again, it is no surprise that sustainable finance is one of the nine transformations outlined in the WBCSD’s Vision 2050. Finance is essentially the essence of our economy and therefore it is the most efficient solution to make the transition happen.

Evidently, what happens in finance trickles down to the business side. With the increasing urgency to react to ESG matters, accelerated after the Covid-19 crisis and re-emphasized by the evolving sustainable finance plans, embracing sustainability has become a must and will be businesses’ license to operate tomorrow. Companies that get trapped in greenwashing and that cannot adopt a long-term perspective will soon cease to perform.

On the flip side, these companies that adopt a long-term perspective and align their business model to the visions of tomorrow will thrive. These companies will be able to overcome the risks and grasp the opportunities brought about by ESG considerations, next to meeting their stakeholders’ expectations.

3 ESG Acceleration Tips to meet investor expectations

1. Identify most material topics for the company and set focus

A winning sustainability strategy is characterized by clear choices on where to focus (direction) and a persistent, rapid execution (speed). Conducting a materiality assessment, and frequently refreshing it is essential to maintain focus and make sure that the company is aligned with its fast-changing environment.

Beware however, to conduct the materiality assessment properly such as to meet local regulations, keep away from greenwashing (by applying the double-materiality principle) and reflect different stakeholder expectations.

2. Link ESG with the business strategy

Sustainability can only flourish when it is effectively integrated into the core of the business. And vice versa, as explained throughout this article, sustainability is not ‘nice to have’ anymore, therefore the sustainability strategy needs to be embedded in the business strategy.

In particular, the sustainability risks should be covered in the company’s enterprise risk management (as more traditional risks would be), while the focus areas should be embedded in the different business functions to identify opportunities at all levels (innovation, supply chain, marketing, sales, etc.). Once the strategy is in place, make it actionable through the development of roadmaps, internal and external communications, and well-prioritized actions.

3. Execute and demonstrate results

To prove your company truly contributes to the sustainable transition by operating in green economic activities, you need to show results – and the numbers to back them up. You need to be able to talk about output and outcome, rather than just input.

Tools like Impact Measurement & Valuation and Portfolio Sustainability Assessment can help to quantify the company’s environmental and social impact on society, and classify products as (more) sustainable.

Are you future-proof for new regulation?

If you are looking to get prepared for new and further upcoming regulations, get in touch with Johana Schlotter at johana@finchandbeak.com or call  +31 6 28 02 18 80 for a frank conversation and to hear about how Finch & Beak can support you in meeting your ambitions.