Commission President Ursula Von der Leyen has set out her ambition for the EU to be the global leader in the fight against climate change. Sustainability will be hardwired into everything the EU does to ensure it reaches its self-imposed objective of climate neutrality by 2050.
In practice this means major overhauls to existing legislation and developing innovative, forward-thinking measures to tackle the climate emergency. ‘Sustainable’ industrial, transport and energy strategies, amongst other sectors, will be the key to the EU achieving its goal.
This transformation will need financing on a massive scale which is why the Commission is also prioritising the integration of environmental, social and governance (ESG) factors into the EU’s financial regulations rulebook.
The initial proposals set out in the Green Deal and 2020 Work Programme, sets the pace and scene for a vast amount of legislative work to be carried out by the European institutions over the next 5 years and beyond and will set out the Commission’s ambitions across a number of policy areas such as:
- EU climate ambitions
- Clean energy
- Sustainable industry
- Building and renovating
- Sustainable mobility
- Eliminating pollution
This will have an impact on EU financial regulations. The Commission has made it clear sustainability/ESG will be at the core of all legislation in future and this will be particularly true for financial services.
Professional money managers will be required to take into account ESG factors in their investment processes, when considering a financial product is suitable for an investor, and when building financial products that can be marketed as ‘sustainable.’
There is growing demand from retail investors for ‘green’ or socially responsible products with current supply lacking so we expect to see a major shift towards ‘green’ products.
If corporates do not provide money managers with sufficient data on ESG factors; continue to carry out carbon-intensive methods or don’t make efforts to transition they may find themselves being excluded from ‘green’ funds or financial products. Over the long-term this will make such companies less attractive investments for both institutional and retail investors which will ultimately lead to an increase in the cost of capital.