On 21 April 2021, the EU adopted a comprehensive package of measures to support sustainable finance and investment in Europe. The package is called the Sustainable Finance Package – or SFP for short – and should be seen as another step towards transforming the financial sector into a key driver of sustainable economic growth in the EU.
The SFP is an important part of the EU's strategy to reach its climate goals. It consists of a variety of initiatives and rules that enable investors to shift investments to more sustainable technologies and businesses. Given the role of the EU as a global standard-setter, even non-EU actors will be indirectly affected.
What Are the Elements of the SFP?
The Sustainable Finance Package consists of three basic elements: the EU taxonomy for sustainable activities, requirements for corporate sustainability reporting (CSRD) and a number of delegated acts on fiduciary duty, product oversight and governance, as well as insurance advice.
We elaborate on the three elements below.
The EU Taxonomy for Sustainable Activities
The EU taxonomy is an EU-wide classification system that defines which economic activities that are aligned to the EU’s 2050 net zero target as well as broader environmental goals.
The overall objective of the taxonomy is to create a standardised approach to the definition of sustainability so that companies can work with and communicate sustainability efforts effectively – and so that investors can distinguish between sustainable and unsustainable investments.
Corporate Sustainability Reporting Directive (CSRD)
CSRD is an EU directive that tightens the requirements for companies' sustainability reporting.
The purpose is to ensure more consistent and reliable reporting across the EU and to give investors, consumers and other stakeholders better access to relevant information about companies' sustainability efforts.
The delegated acts will ensure that financial organisations, such as advisors, asset managers, insurance companies, etc. include sustainability in their procedures and investment advice to customers.
This part of the package encourages the financial system to support companies that are on the path to sustainability, as well as already sustainable companies. In addition, the legal acts will strengthen the EU's fight against greenwashing.
Overall, the legal acts can be divided into three categories: fiduciary duty, product oversight and governance, as well as insurance advice.
- Fiduciary duty: The SFP clarifies the obligations a financial undertaking has when assessing its sustainability risks. For example, it should assess the impact of floods on the value of its investments.
- Product supervision and governance: Creators of financial product must take sustainability factors into account when designing their financial products.
- Insurance advice: When assessing a client's suitability for an investment, an advisor must discuss the client's sustainability preferences.
The Future Demands Sustainability
In recent years, the EU has taken major steps to build a sustainable financial system that contributes to the transition to a carbon-neutral Europe. The SFP is a key player in this regard and forms the very foundation of the EU's work to increase transparency and provide investors with tools to identify sustainable investment opportunities.
There is no doubt that the future requires sustainability, and as a company, it is essential to incorporate sustainability into your business. The big advantage is that you can reduce your environmental impact and minimise your ecological footprint - but there is also a competitive advantage in investing in the sustainability account.
More and more consumers and businesses are demanding sustainable products and services, and in line with the above, sustainable businesses will find it easier to attract capital from investors in the future. Overall, sustainability in business can increase an organisation's long-term success and contribute to a more sustainable future for all.