In the interest of encouraging sustainable investment while easing the transition to a more resource-efficient economy, the European Commission is making a comprehensive effort, through various new and updated regulations, to bolster its Action Plan on sustainable finance. The overarching aim is to provide clarity to both corporates and investment firms on how environmentally friendly different activities are, and to drive more capital to fund greener economic activities. These classifications are intended as one step towards a financial system that supports sustainable growth, particularly in times of market volatility. They also serve as yet another indicator that environmental, social and governance (ESG) issues are growing in importance for financial institutions.
This series of new legislation, with the new EU Taxonomy as a key component, will help market participants ensure they invest in truly green opportunities that align with the Paris Agreement, and don’t fall foul of ‘greenwashing’ attempts. As the European Commission’s Sustainable Finance Action plan dictates, new regulations will require investment firms to clarify the ‘greenness’ of their investment strategies using a common language.
Driven by client demand and wider uncertainty, asset owners are increasingly making ESG factors a main priority. This close attention is creating a ripple effect – as asset owners generate more investment based on these ESG considerations, they become top of mind for portfolio managers and sell side market-makers as well.