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The EU’s plans to drive increased sustainable finance practices

How is the European Union planning to drive increased sustainable finance practices and mobilise the financial sector for sustainability objectives? ESG Consultant Enda Twomey discusses the EU sustainable finance agenda.

A fundamental part of the EU Green Deal is the mobilisation of both public and private capital to achieve its objectives. In January 2020, the European Commission presented the European Green Deal Investment Plan with the intention of investing one trillion euros in sustainable investments over the course of the decade.

The EU Commission believes that the private sector has a key role as it can

“re-orient investments towards more sustainable technologies and businesses finance growth in a sustainable manner over the long-term contribute to the creation of a low-carbon, climate resilient and circular economy”

Source - European Commission

The development by the European Commission of the sustainable finance agenda predates the Jan 2020 announcement. In this article we will look at that agenda.

Definition of Sustainable Finance

The EU Commission defines Sustainable Finance as follows:

“Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects. Environmental considerations might include climate change mitigation and adaptation, as well as the environment more broadly, for instance the preservation of biodiversity, pollution prevention and the circular economy. Social considerations could refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities, as well as human rights issues. The governance of public and private institutions – including management structures, employee relations and executive remuneration – plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.”

Source: European Commission

Action Plan on Financing Sustainable Growth

Whereas the Green Deal was launched in 2019, the sustainable finance agenda had already been progressed by the preceding 2018 Action Plan (‘2018 Strategy’) on Financing Sustainable Growth. The Objectives and the 10 Point Action Plan are set out below -

The Objectives of the 2018 Strategy

  1. Reorienting capital flows towards sustainable investment

  2. Mainstreaming sustainability in risk management

  3. Fostering transparency and long-termism

The 10–point Action Plan and related initiatives of the 2018 Strategy

  1. Establishing an EU classification system for sustainability activities (See EU Taxonomy)

  2. Creating standards and labels for green financial products (See EU Green Bonds and EU Eco Labels proposals)

  3. Fostering investment in sustainable projects (See EU funding mechanisms and International Platform for Sustainable Finance)

  4. Incorporating sustainability when providing investment advice (See changes to MiFID II and Insurance Distribution Directive and ESMA Report)

  5. Developing sustainability benchmarks (See EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks, and sustainability-related disclosures for benchmarks)

  6. Better integrating sustainability in ratings and research (See ESMA Technical Advice and Final Guidelines to Credit Rating Agencies)

  7. Clarifying institutional investors and asset managers' duties (See Sustainable Finance Disclosure Regulation and relating regulations)

  8. Incorporating sustainability in prudential requirements (See ongoing considerations of green supporting factor and potential Pillar 1 and Pillar 2 responses and ESG Risk Management guidance)

  9. Strengthening sustainability disclosures and accounting rule-making (See draft Corporate Sustainability Reporting Directive and Article 8 of EU Taxonomy Regulation and EFRAG draft disclosures guidance)

  10. Fostering sustainable corporate governance and attenuating short-termism in capital markets (See proposed Corporate Sustainable Due Diligence Directive, various EBA and ESMA Reports on short-termism in capital markets)

Strategy for the Financing the Transition to a Sustainable Economy 2021

A new strategy was launched by the EU commission in July 2021 (‘2021 Strategy’) and the text of the Communication can be found here.

The 2021 Strategy outlines how it relies on the following building blocks of the 2018 strategy.

  1. The EU Taxonomy referred to as “A common classification of economic activities substantially contributing to environmental objectives, using science-based criteria.”

  2. Disclosures referred to as a “Comprehensive disclosure regime for both non-financial and financial institutions to provide investors with the information necessary to make sustainable investment choices.”

  3. Tools referred to as a “Broad toolbox for companies, market participants and financial intermediaries to develop sustainable investment solutions while preventing greenwashing.”

The EU Commission acknowledges that work remains to be done to complete the actions under the 2018 strategy. The 2021 strategy is composed of the following four areas:

Financing the transition to sustainability - further developing the EU Taxonomy and the use of EU ECO labels in areas such transition and sustainable linked bonds.

Towards a more inclusive sustainable finance framework - developing retail financial products such as green loans and green mortgages, meeting sustainable finance data challenges, reviewing insurance gaps, producing a social taxonomy, and tracking spending on climate and biodiversity.

Improving the financial sector’s resilience and contribution to sustainability -

a. Capturing sustainability risks in financial reporting standards, incorporating sustainability risks in credit ratings, ensuring amendments to capital requirements and Solvency II requirements reflects the incorporation of sustainability risks and strengthening long term stability of the financial sector from environmental degradation and biodiversity loss.

b. Improving disclosures of sustainability targets and transition plans, review of fiduciary duties in respect of pension plans and acting to improve reliability and comparability of ESG ratings and quality of ESG research.

c. Monitoring and where necessary, acting on greenwashing and developing monitoring frameworks to measure capital flows, developing a common approach to monitor orderly transitions and integration of the common materiality perspectives

Fostering global ambitions - reaching consensus internationally on concepts of double materiality, disclosures, and taxonomies, strengthening work and governance of International Platform for Sustainable Finance and support for low- to middle income countries in accessing sustainable finance.


The EU Commission has a wide, comprehensive, and ambitious programme to develop and deploy sustainable finance in pursuit of the objectives of the EU Green Deal. It challenges financial institutions (amongst other things) to absorb detailed and comprehensive regulatory changes; to play their part in funding the necessary changes: and to support their customers on the journey to a more sustainable future.

In future articles, we will explore in more detail the constituent parts of the 2018 and 2021 strategies and the challenges they bring and continue to bring.

Author: Enda Twomey - ESG, Culture and Risk Consultant.

The views expressed in this article are the personal views of the author and not those of the IOB. This article does not constitute and should not be regarded as legal or regulatory advice.