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Sustainable finance and corporate responsibility have become strategic topics for corporations, including financial institutions, as clients’ expectations are increasingly shifting towards green and sustainable products.

Sustainable finance has several definitions. One of the most commonly adopted is the one proposed by the G20 Sustainable Finance Study Group, which says:

Sustainable finance can be broadly understood as financing as well as related institutional and market arrangements that contribute to the achievement of strong, sustainable, balanced and inclusive growth, through supporting directly and indirectly the framework of the Sustainable Development Goals (SDGs). A proper framework for sustainable finance development may also improve the stability and efficiency of the financial markets by adequately addressing risks as well as market failures such as externalities.

Without any doubt, a main trigger for this regulatory revolution has been the actions taken by the European Union, in particular since the publication of the EU Commission’s Action Plan: Financing Sustainable Growth (EU Action Plan on Sustainable Finance) in 2018.

The EU Sustainability Taxonomy Regulation (Regulation (EU) 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment) has impacted not only financial institutions, but also large companies as it introduced amendments to the EU Non-Financial Reporting Directive (NFRD). In this context, it is important to know that it is not only the EU which is working towards having a fully operational a Sustainability Taxonomy, but, in fact, there are more than 15 countries across the globe moving towards the same direction.

Moreover, the regulation creating the framework for the EU Climate Transition Benchmarks and the EU Paris-aligned Benchmarks encourages the use of and reliance on global standards such as those of the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD).

EU Sustainable Finance Disclosures Regulation (Regulation (EU) 2019/2088 on Sustainability-Related Disclosures in the Financial Services Sector) lays down harmonized rules on:

The transparency expectations investors have to abide by when integrating sustainability risks;

EU Climate Transition Benchmarks and the EU Paris-aligned Benchmarks (Regulation (EU) 2019/2089 on EU Climate Transition Benchmarks (EU CTB), EU Paris-aligned benchmarks and sustainability-related disclosures for benchmarks (EU PAB) introduces two benchmarks to help investors compare the carbon footprint of investments:

The adoption of these benchmarks is voluntary. However, labelling a portfolio as following either the EU CTB or EU PAB triggers disclosure obligations.

EU Sustainability Taxonomy Regulation (Regulation (EU) 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment) is instrumental in enabling the EU to become climate neutral by 2050. It creates a unified classification system to define

In addition, in July 2021, the EU Commission has launched its Strategy for Financing the Transition to a Sustainable Economy, which aims to build on the work of the EU Action Plan on Sustainable Finance. The Strategy envisages 22 policy-related actions to be taken by the EU pertaining to topics like green loans, green mortgages, and the integration of sustainability-related considerations into prudential rules.

When looking at the regulatory landscape from a corporate responsibility perspective it is possible to observe a rapid increase of mandatory regulations in the area of environmental and human rights due diligence. This movement has not only been identified by Policy Outlook research, but also by members of the UN Working Group on Business and Human Rights, who have affirmed that “our future is one of mandatory measures. We now have a strong evidence-base telling us that voluntary measures aren’t getting us where we need to be.”