Financial sector moves ever closer to sustainability

08 Dec 2021

For some time now, asset managers have been offering sustainability-focused products to meet growing market demand in this area. However, digital investment is becoming increasingly common in Europe, a trend driven by several factors: investor interest, social demands, and the current regulatory environment. Although the European Union is still lagging digitally, this growth indicates its future as a leader in the transformation towards sustainability, thanks to a number of agreements and initiatives with this goal in mind.

The transformation of investments after the Paris Agreement

This string of notable international agreements were passed between 2015 and 2016, highlighted by the Paris Agreement on climate change and the United Nations Sustainable Development Goals (SDGs). From this moment on, Europe started to develop its laws and initiatives to boost efforts towards transitioning to sustainable and ecologically responsible business processes. For example, take the European Climate Law, focused on environmental reform, and specifically targeting neutral harmful gas emissions by 2050. This process was actually aided by COVID-19, which led to several relevant aid programs like Next-Generation funds, aimed to build a greener, more resilient, and more environmentally responsible Europe.

Regulations affecting application of ESG criteria towards investments

A side effect of sustainability’s growth as an important factor in the European financial sector are new laws specifying what constitutes such responsible behavior, aiming to encourage investment in this type of activity.

Specifically, a taxonomy regulation has been proposed that seeks to establish unique and homogeneous criteria to mark an activity as environmentally sustainable. Other rules are being modified to address the ESG preferences of clients, advising them and providing them with all the necessary information.

In addition, revision of the Non-Financial Reporting Directive is being considered. This seeks to offer viable information from companies on aspects related to human rights and environmental responsibility, requiring a transparent methodology to avoid different interpretations of the law’s reporting requirements.

The future of finance, inseparable from sustainability

Sustainability has been a hot topic in recent years, in the financial sector and abroad. However, sustainability as a concept has been difficult to define, and many sustainability actions have been popular as simple publicity stunts. However, with the introduction of new regulations and the application of explicit criteria, it will be easier for banks and the wider financial sector to allocate more funds to sustainable projects.

As these regulations take hold, unsustainable projects will eventually become obsolete and increasingly inefficient, leading to an ecosystem in which being ecologically responsible is also profitable. With luck and proper implementation and monitoring, these first steps will be definitive in the EU’s journey towards becoming a world leader in stability, sustainability, and efficiency.

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