History of European sustainable finance

Adoption of the EU’s first energy-climate package

In 2008, the European Union adopted its first Energy-Climate Package, setting ambitious targets for 2020, known as the‘3×20‘. This legislative package aims to combat climate change and strengthen the EU’s energy security, and sets out three key objectives:

1. Reduce greenhouse gas emissions by 20% compared to 1990 levels.
2. Increase the share of renewable energies to 20% of total energy consumption.
3. Improve energy efficiency by 20%.

This initiative marks a turning point in European climate policy, laying the foundations for a long-term energy transition.

Adoption of the EU’s 2030 climate-energy framework

In October 2014, the European Council adopted the Climate and Energy Framework 2030, reinforcing the EU’s climate ambitions.Main objective: Reduce greenhouse gas emissions and increase the use of renewable energies by 2030.

Key targets:

• Reduction of GHG emissions by at least 40% (compared to 1990)
• Renewable energy share of at least 27% of final consumption
• Energy efficiency improvement of at least 27%.

Complementary measures:

• Reform of the Emissions Trading Scheme (ETS)
• New indicators for energy security and interconnection

This framework lays the groundwork for the EU’s medium-term energy transition, paving the way for more ambitious long-term goals.

Adoption of the ESG Preferences Directive in MiFID II

August 2, 2022 marks an important milestone in the integration of ESG (Environmental, Social and Governance) criteria into the European financial sector with the entry into force of amendments to the MiFID II Directive concerning sustainability preferences.

Key points of this new regulation:

• Obligation to assess: Investment firms must now ask their customers about their sustainable investment preferences as part of the suitability assessment.
• Integration into advice: These preferences must be taken into account when proposing suitable financial products.
• Definition of sustainability preferences: These refer to sustainable investments according to the European Taxonomy, within the meaning of the SFDR regulation, and to those taking into account the main negative impacts on sustainability factors.
• Combating greenwashing: This directive aims to promote genuinely sustainable financial products and avoid misleading ‘green’ marketing.
• Adapting processes: Financial players must modify their customer questionnaires and advisory processes, and develop tools to integrate these new requirements.

This directive represents a significant step towards aligning the financial sector with the European Union’s sustainability objectives, by encouraging greater transparency and directing financial flows towards more responsible investments.

EU Action Plan for Sustainable Finance adopted

On March 8, 2018, the European Commission took a major step forward in the development of sustainable finance by adopting its ‘Action Plan: financing sustainable growth’. This ambitious plan aims to redirect capital flows towards a more sustainable economy and integrate sustainability into financial risk management.

Key points of the action plan :

Main objectives:

• Redirect capital flows towards sustainable investments
• Manage financial risks linked to climate change and environmental and social issues
• Promote transparency and a long-term vision in economic and financial activities.

Concrete actions:

• Establish a unified European classification system (taxonomy) for sustainable activities
• Create labels for green financial products
• Clarify the sustainability obligations of institutional investors and asset managers
• Increase corporate transparency on environmental, social and governance policies.

Implementation :

• Creation of a technical expert group on sustainable finance
• Proposal of regulations and directives to give concrete form to the plan’s actions.

This action plan marks a decisive turning point in Europe’s approach to sustainable finance, laying the foundations for a comprehensive regulatory framework aimed at aligning the financial sector with the EU’s climate and sustainable development objectives.

Adoption of the SFDR Regulation, a Major Step Forward for Transparency in Sustainable Finance

On November 27, 2019, theEuropean Union adopts Regulation (EU) 2019/2088, known as the Sustainable Finance Disclosure Regulation (SFDR) or ‘disclosure regulation’. This regulation marks a crucial step in the evolution of sustainable finance in Europe.

Key points of the SFDR regulation :

Main objective:

• Improve transparency on sustainability in the financial services sector.

Scope:

• Financial market players(asset managers, insurers, etc.)
• Financial advisors

Transparency requirements :

• At entity level: Sustainability risk management policies, consideration of negative impacts on sustainability factors.
• Product level: Integration of sustainability risks, environmental or social features promoted.

Classification of financial products:

• Article 6: Products with no sustainability objective
• Article 8: Products promoting environmental or social characteristics
• Article 9: Products with a sustainable investment objective

Implementation:

• Adoption in 2019
• Entry into force on March 10, 2021

The SFDR regulation aims to combat greenwashing by providing investors with comparable and standardized information on the sustainability of financial products. It forms part of the broader framework of the EU Sustainable Finance Action Plan, helping to redirect capital flows towards a more sustainable economy.

Launch of the European Green Deal

In December 2019, the European Commission presents the European Green Deal, an ambitious action plan to transform the EU economy to achieve climate neutrality by 2050. This initiative represents a decisive turning point in the Union’s environmental and economic policies.

Main objectives:

1. Climate neutrality: Achieve zero net greenhouse gas emissions by 2050.
2. Emissions reduction: Reduce greenhouse gas emissions by at least 55% by 2030 compared to 1990 levels.
3. Circular economy: Promote an economy that minimizes waste and maximizes the reuse of resources.

Key Green Deal measures:

• Fit for 55: A set of legislative proposals to align EU laws with its climate goals.
• Just Transition: Establishment of a Just Transition mechanism to support regions and sectors dependent on fossil fuels, with a proposed budget of €100 billion.
• Sustainable mobility: Promotion of electric vehicles and the necessary infrastructure, with a target of installing one million public charging points by 2025.
• Sustainable agriculture: Development of a ‘farm to fork’ strategy to ensure a healthy and environmentally-friendly food system.

Financing:

The Green Deal provides for a total investment of over €1 trillion to finance the reforms needed for sustainable economic growth and climate transition.

Significance:

The European Green Deal is seen as a systemic response to today’s environmental challenges, integrating various sectors such as energy, transport, agriculture and finance. It aims not only to protect the environment, but also to foster inclusive and sustainable economic growth for all European citizens.

Creation of the EFRAG Task Force on non-financial reporting standards

• June 2020: The European Commission mandatesEFRAG to undertake preparatory work on possible European non-financial reporting standards.
• September 2020:EFRAG creates a multi-stakeholderTask Force (PTF-NFRS) responsible for this preparatory work.

Objective:

• To develop recommendations on the content and structure of potential European non-financial reporting standards.

Composition:

• The Task Force comprises around 35 experts representing a wide range of stakeholders(public sector, private sector, SMEs, civil society).

Timetable:

• Launch of work in September 2020
• Publication of a progress report in November 2020
• Final report to the European Commission in February 2021

The final report, published on March 8, 2021, proposes a roadmap for the development of a comprehensive set of European sustainability reporting standards.
Following this report, the Task Force is renamed PTF-ESRS(Project Task Force on European Sustainability Reporting Standards) and tasked with beginning the technical development of the standards.

This initiative is part of the wider European Green Deal and the revision of the Non-Financial Reporting Directive (NFRD), aimed at improving the quality and comparability of sustainability information published by companies.

Adoption of the European Taxonomy Regulation

On June 18, 2020, the European Parliament adopts Regulation (EU) 2020/852, known as the Taxonomy Regulation, which establishes a classification system for environmentally sustainable economic activities.

Key points of the Taxonomy Regulation:

Objective:

• Create a common language and a clear definition of what is ‘sustainable’, to guide investments towards sustainable activities.

Criteria for an activity to be considered sustainable:

• Contribute substantially to at least one of the six defined environmental objectives.
• Do not cause significant harm to the other objectives.
• Respect minimum social guarantees.

Six defined environmental objectives:

1. Climate change mitigation
2. Adaptation to climate change
3. Sustainable use and protection of aquatic and marine resources
4. Transition to a circular economy
5. Pollution prevention and control
6. Protection and restoration of biodiversity and ecosystems

Progressive implementation :

• Entry into force July 12, 2020
• Application from January 2022 for the first two climate objectives
• Application from January 2023 for the other four targets

Reporting obligations :

• For companies subject to the non-financial reporting directive
• For financial market players offering financial products

The Taxonomy Regulation is a central pillar of the EU’s Sustainable Finance Action Plan, aimed at redirecting capital flows towards a more sustainable economy.

Adoption of the delegated act on the European Taxonomy

On June 4, 2021, the European Commission adopted the first delegated act relating to Taxonomy(delegated regulation 2021/2139).

Key points of this delegated act:

• Definition of technical examination criteria to determine:

1. Under which conditions an economic activity can be considered to contribute substantially to the first two environmental objectives(climate change mitigation and adaptation).
2. Whether this activity does not cause significant harm to the other environmental objectives.

• Scope of application:

1. It covers the economic activities of almost 40% of listed companies in sectors responsible for almost 80% of direct greenhouse gas emissions in Europe.
2. The delegated act establishes technical criteria for 88 economic activities in sectors such as energy, forestry, industry, transport and buildings.

• Entry into force :

1. January 1, 2022 for the first two climate objectives(mitigation and adaptation).

This delegated act is a crucial step in the practical implementation of the European Taxonomy, providing a detailed framework for identifying environmentally sustainable economic activities. It aims to direct investment towards sustainable projects and activities, thereby contributing to the EU’s climate objectives.

Green Pact for Europe and European Climate Law

In 2021, the European Union adopts the Green Pact and the European Climate Law, reinforcing its commitment to the fight against climate change.Main objective: Achieve carbon neutrality by 2050.

Reinforced targets for 2030:

• Reduce greenhouse gas emissions by at least 55% compared to 1990 levels
• Increase the share of renewable energies to 40%.
• Improve energy efficiency by 32.5%.

Key measures:

• Revision of the Emissions Trading Scheme (ETS)
• Border carbon adjustment mechanism
• Biodiversity strategy for 2030

The Green Pact and Climate Law mark a turning point in EU environmental policy, establishing a binding legal framework for the ecological transition.

Adoption of the first ESRS by the European Commission

Adoption of ESRS (European Sustainability Reporting Standards)

• Date: July 31, 2023 – The European Commission adopts the first set of ESRS in the form of adelegated act.
• Context: These standards are part of the Corporate Sustainability Reporting Directive (CSRD), which came into force on January 5, 2023.
• Objective: To provide a standardized and detailed framework for sustainabilityreporting by companies subject to the CSRD.

Main features of ESRS :

• Binding standards: ESRS have the force of law for the companies concerned.
• Double materiality approach: Companies must report both :

1. Their impact on the environment and society
2. The risks and opportunities that sustainability issues represent for them

• Broad thematic coverage:

1. Environment: climate, biodiversity, pollution, aquatic and marine resources, circular economy
2. Social: human rights, working conditions
3. Governance: business ethics, transparency

Structure of ESRS :

• 2 transversal standards(ESRS 1 and 2)
• 10 thematic standards covering environmental, social and governance aspects

Progressive application :

• Staggered implementation from 2024, depending on company size and status.

ESRS aim to improve the transparency, comparability and reliability of sustainability information published by European companies, thereby contributing to the objectives of the European Green Deal and the redirection of financial flows towards sustainable activities.

Adoption of the CSRD Directive

• Effective date: January 5, 2023
• Objective: To set new non-financial reporting standards and obligations for large companies and SMEs listed in the European Union.

Key features of the CSRD:

Expanded scope:

• Approximately 50,000 companies in Europe (previously 11,700)
• Includes large companies and listed SMEs

Principle of double materiality:

• Companies must report on both: a) Their impact on the environment and society b) The risks and opportunities that sustainability issues represent for them

Disclosures:

• Environmental: climate, biodiversity, pollution, resources
• Social: working conditions, human rights
• Governance: business ethics, fight against corruption

Standardized reporting:

• Mandatory use of European Sustainability Reporting Standards (ESRS)

External verification :

• Published information must be certified by an independent third party

Digitization:

• Information must be published in a standardized digital format

Progressive application :

• Staggered implementation between 2024 and 2028 depending on company size and status

The CSRD aims to improve the transparency, comparability and reliability of sustainability information published by European companies, thereby contributing to the objectives of the European Green Deal and the redirection of financial flows towards sustainable activities.

Adoption of the CS3D directive

Directive on corporate duty of care

Main objective:

• To oblige companies to identify, prevent, mitigate and remedy the negative impacts of their activities on human rights and the environment, throughout their global value chains.

Scope of application:

• Large EU companies(over 1,000 employees and worldwide sales of over €450 million).
• Non-EU companies with significant operations in the EU(annual sales in the EU in excess of €450 million).

Main obligations :

• Integrate the duty of vigilance into the company’s risk management policies and systems.
• Identify and assess actual and potentialnegative impacts on human rights and the environment.
• Prevent, mitigate and end identified negative impacts.
• Establish complaint and reporting mechanisms.
• Monitor the effectiveness of measures put in place.
• Communicate publicly on due diligence policies and measures.
• Develop a climate transition plan aligned with the 1.5°C target for companies with more than 1,000 employees.

Sanctions and civil liability:

• Fines of up to 5% of worldwide net sales.
• Possibility for victims to claim compensation in the event of damage.

This directive represents a major step forward in regulating the activities of companies worldwide, requiring them to take account of the social and environmental impacts of their entire value chain.