New EU Regulation: Bringing Sustainability to the Forefront

• A call to action for the EU

• Promoting sustainable finance

• The integration of climate change into risk modeling

• The future of sustainable economies

European Commission Action Plan

In 2018, the European Commission published an Action Plan that has led a major expansion in frameworks and foundations for sustainable finance. The leading reason? The European Union has announced their aim for climate neutrality by 2050. The Action plan is centered around three main elements: Redirecting capital to the real economy, acknowledging that climate risk is a systemic risk, and encouraging transparency and long-term investments. In addition to these three elements, the action plan focuses on several key themes and sectors including energy security and clean affordable energy, zero pollution, the circular economy, sustainable food production, and biodiversity. 

The European Taxonomy: Promoting Sustainable Finance

A key element of the action plan, the European Taxonomy, includes mitigation and adaptation efforts that arise for combating climate change. In 2021, this framework will also include pollution prevention, waste management, and water protection, among other focuses. This taxonomy framework encourages green investments because it allows financial stakeholders to evaluate their investments through a sustainable lens. Further regulation through the taxonomy framework means that greenwashing will be monitored more closely — encouraging truly green investments. In addition to regulation, an EU Green Bond Standard is in the works to create minimum criteria under which bonds can be characterized as meeting specific environmental goals. 

Environmental and Climate Risks are Material and Financial Risks

The growing concern for close regulation of climate risks is due in large part to the fact that the EU has identified that environmental risks are material to financial considerations. As such, climate and environmental risks must be managed and analysed like any other financial risk. The management of climate risks is now included in the fiduciary duty of portfolio managers who manage assets and portfolios within the EU. 

Investing for the Future

Financial products will be classified under one of three categories: 

1. Sustainable products
2. Products that “promote environmental or social characteristics” 
3. Other products

While these categories are broad, they help to transparently categorize financial products available to investors. Streamlining capital into sustainable initiatives assists in the larger EU goal to raise roughly 180 billion euros per year to help in financing the European Sustainable Development Programme. Fostering growth in investments for ESG factors is crucial for ensuring the health and wellbeing of not just economies, but nations as a whole. The long term investments that are associated with impact investing are conducive to sustainable growth and provide structural shifts that will assist in transitioning many sectors of the European economy to green infrastructures and technologies. 

Moving Towards a Sustainable Economy

The EU Sustainability Disclosure Regulation (SDR) is a comprehensive push towards stimulating more capital to be invested in a sustainable economy. By mainstreaming sustainability concerns into risk management, investors’ duties are more clearly outlined when it comes to accounting for environmental damage. Angeling investments to account for a more robust, green economy, the EU SDR is providing opportunities for expansion in the green sector. 

At Physis, we remain committed to these same goals: transparency, sustainability, and investing in a better tomorrow. Join us today, and learn how your investments align with new EU regulations.

Sources:

EU Regulation on Sustainable Finance: A Considerable Challenge

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

Targeted consultation on the establishment of an EU Green Bond Standard

Sustainable Finance Disclosure Regulation (SFDR): What to Expect?