EU Sustainable Finance Explained

Riikka Sievänen, Advisory Senior Manager, PhD at Tomas Otterström KPMG Global Leader in Sustainable Finance Services have written the following article, the first in a series of blogs entitled "EU Sustainable Finance explained".

Part I - An overview

Megatrends, and particularly climate change, have become key topics on the agenda of corporates, investors and governments. The costs they would incur are greater than the costs of steps that can be taken now to mitigate some of their effects. The fallout from the 2007-2009 financial crisis has caused governments to launch considerable efforts to prevent similar crises from happening in the future and has also imbued European economies and the financial markets with a strong climate change perspective. The key lessons learnt were that the financial markets lacked transparency, long-termism and suitable sustainability metrics, as well as appropriate regulation. These insights, together with the final report of the High-Level Expert Group on Sustainable Finance, formed the basis for the EU Action Plan on Sustainable Finance.

Currently, the EU is working on the concretization of the Action Plan, with the support of the EU Technical Expert Group on Sustainable Finance (EU TEG). This means that selected actions (among the ten suggested actions for sustainable growth) are being transformed into legislative proposals at the EU level and for future national level regulation. The ten actions and the respective legislative proposals include the development of a European taxonomy on sustainable activities, low carbon benchmarks and the development of labels and standards, such as the green bond standard and ecolabels. This means that financial institutions will also need to take sustainability into account in their strategies, in their risk management related to investments and business, as well as in their reporting. Companies of a certain size across all sectors are being guided to report on their approach to climate issues in addition to the more conventional corporate responsibility topics.

On 18 June, the EU shed more light on these when it published its supplement on reporting climate-related information (part of the non-binding reporting guidelines). On the same day, the EU TEG published its reports on taxonomy, the green bond standard and low carbon benchmarks.

Why should one pay attention to these? First, we must recognize that the term "sustainable finance" relates not only to financial sector...