The EU Sustainable Finance Initiative - Implications for Responsible Investing

The EU is currently launching new regulations on responsible investing. With the implementation of these, many investors will soon need to integrate sustainability and ESG in a more systematic manner.

By recognizing the Sustainable Development Goals (SDGs) and the Paris Agreement on Climate Protection in 2015 as global guiding principles, the EU has committed itself to a sustainable development of the European society. To achieve this goal, the EU assigns a particularly important role to the financial industry.

The EU estimates that in order to meet the 2030 climate and energy objectives alone, an annual investment of approx. 180 billion euros is necessary, which must in part be provided by the private sector.

In order to accelerate the sustainability efforts of the financial sector, an expert group published a report in 2018 providing specific recommendations, which the EU has now implemented in its action plan for financing sustainable growth.

The plan has three main targets:

1. reorient capital flows towards sustainable investment
2. manage financial risks stemming from climate change, environmental degradation and social issues
3. foster transparency and long-termism in financial and economic activity

The action plan contains a package of measures which provides for significant regulatory changes. Amongst others, the following proposals are to name in particular:

• obligations for investors to disclose on sustainability aspects and risks (ESG aspects) in investment activities
• establishment of a clear and detailed EU classification system – or taxonomy – for sustainable activities
• development of benchmark values for CO2 emissions and for positive CO2 effects in investments

While the latter two legislative initiatives are intended to provide a point of reference for sustainable investments in the medium term, the planned disclosure obligations with regard to sustainability risks in particular will pose new challenges for investors in the short term and regardless of the asset class.

Especially those investors who have not yet (or only to a limited extent) implemented sustainability into their organization will soon have to deal more closely with their role in responsible investing in the near future. Generally, this includes a clearly formulated policy and an appropriate integration of ESG aspects in investment processes and decisions. Along with that, it also becomes increasingly important to strengthen the awareness for responsible investing within the organization.

Companies that already have an ESG management in place will be somewhat more relaxed about the EU initiative on sustainable finance, especially as the current legislative proposals still allow for some flexibility in implementation. But even here, pioneers in all investment classes are already establishing best-practices, which are also known to the EU and by which all other investors will likely have to measure themselves in the future.