Article

Sustainable Finance

Frequently Asked Questions


What is sustainable finance? 


Sustainable Finance involves the creation of long-term economic value
and societal value by making sound financial decisions. Making sound
financial decisions is achieved by taking sustainability risks and
opportunities (or environmental, social and corporate governance factors)
into account in financial models, financial product development, and
strategic financial decisions, but it also requires that capital markets
provide its economic agents with the right incentives to focus on long-term
value creation. In practice, it can encompass different activities in
different contexts, such as sustainable investing, sustainable banking and
lending, impact investing, sustainable financial product development, and
shareholder activism.  
  


What are ESG factors?  


The acronym ESG stands for Environmental, Social and Governance and
pertains to environmental, social and corporate governance factors.
Environmental factors include concerns related to the ecological footprint of
a company, region or country and the need for environmental preservation,
environmental policy and environmental product management. Social factors
include employee rights, security, diversity, education, human rights, access
to health and physical development, literacy, among others. Corporate governance factors refer to the system of policies and practices under which a company is run and controlled, covering issues of transparency, independence of corporate bodies, shareholder rights, anti-corruption, and organisation of the corporate governance model for achieving long-term goals, among others.  
  


What is the EU doing with respect to sustainable finance?  


The EU launched the EU Green Deal which is a set of policy initiatives defined by the European Commission. The targets at its core are:  
· 50% to 55% cut in emissions by 2030;  
· EU-Wide goal of net zero carbon emissions by 2050.  
  
The EU plans to achieve these targets via:  
· Impact on overarching policy areas;  
· A forecasted €1 trillion in investment;  
· Private sector investment.  
  


What is SFDR?   


The new Sustainable Finance Disclosure Regulation (SFDR)
introduced various disclosure-related requirements for financial market
participants and financial advisors at entity, service and product level. It
aims to provide more transparency on sustainability within the financial
markets in a standardised way, thus preventing greenwashing and ensuring
comparability. A first set of new disclosure obligations is applicable as of
10 March 2021.   
  


What is the EU Taxonomy?  


The EU taxonomy is a common classification system encouraging private investment in sustainable growth and contributing to a climate neutral economy. The EU taxonomy system establishes a list of environmentally sustainable economic activities. It is an important enabler to scale up sustainable investment and to implement the European Green Deal. Notably, by providing appropriate definitions to companies, investors and policymakers on which economic activities can be considered environmentally sustainable. The 6 sustainable objectives of EU Taxonomy are :  
1.  Climate change mitigation  
2. Climate change adaptation  
3. The sustainable use and protection of water and marine resources  
4. The transition to a circular economy  
5. Pollution prevention and control  
6. The protection and restoration of biodiversity and ecosystems  
  


What are the SDGs?  
  


Our planet faces massive economic, social and environmental
challenges. To combat these, the UN developed 17 Sustainable Development
Goals (SDGs) which define global priorities and aspirations for 2030. They
represent an unprecedented opportunity to eliminate extreme poverty and put
the world on a sustainable path. The 17 goals can be found here.  
  


What are climate risks?  


Climate related risks are created by a range of hazards. Some are slow in their onset (such as changes in temperature and precipitation leading to droughts, or
agricultural losses), while others happen more suddenly (such as tropical
storms and floods). It is now widely recognised that climate-related impacts
are not just a future threat. 3 types of risks are generally associated with
climate risks.   
· Physical risks which arise from increasing severity and frequency of
  climate and weather-related events;  
· Transition risks which arise from the required change in technology
   towards a carbon-neutral economy;  
· Liability risks which arise from parties who suffered loss or damage
   from physical or transition risks.  
  


What are the different sustainable financial products?  


There are several kinds of sustainable financial products, the best
known of which are ethical or sustainable investment funds (SRI UCIs).
Lesser-known products include sustainable insurance products, sustainable
savings products and sustainable credits (‘green loans’). Corporations,
States and non-Sovereign organizations also issue Green Bonds in which public
and private investors can invest in. The debt will be used only to finance
sustainable projects.   
  


What are Green Bonds?  


Green bonds are debt securities aimed at issuers' financing and are instruments specifically designed for climate and environmental projects contributing to Sustainable Development. Most green bonds issued to date, fund renewable energy projects, energy efficiency measures, low-carbon public transport and water technology. Green Bonds may be issued by States and private issuers.  
  


What can I do today to start benefiting from sustainable finance?  


You could investigate the following areas:  
· Does the company have a sustainability strategy or policy?  
· Does the company comply with the existing legislation?  
· Is the company ready to comply with the future legislation?  
· Is the company aware of the exposures of its financial products?
  (stress-tests, sectors covered…)  
· Does the company sign any Sustainability initiatives?  
· Does the company collect sufficient and high-quality data to report
  and disclose on a transparent way?  
· Understand who are currently the best actors in Sustainable Finance
  and what concrete steps they undertook to achieve their current position.  

Did you find this useful?