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Europe’s sustainable finance regulation will drive global change

 

  • The EU’s sustainable-finance framework is reshaping the market for sustainable investment
  • The regulation will encourage innovation, bring new companies to market and encourage greater disclosure
  • The impact of the regulations will be felt far beyond the borders of Europe

Europe’s groundbreaking sustainable finance regulations are reshaping the market for sustainable investment, bringing new companies to market, encouraging greater disclosure and setting a benchmark for the rest of the world, according to NN Investment Partners (NN IP). The EU has led the world in its response towards climate change and environmental degradation, seeking to achieve no net emissions of greenhouse gases by 2050 and to decouple economic growth from the use of natural resources [1].

The need for more sustainable investment is pressing. An additional EUR 180 billion [2] will be needed each year to put Europe on the path to environmental and socio-economic stability by 2030, according to the European Commission.

Adrie Heinsbroek, Chief Sustainability Officer, NN Investment Partners shares: “Europe’s new regulatory framework for sustainable finance will help spur the transition to a more inclusive, climate-neutral economy. It’s designed to boost market transparency and channel investment to companies that are working to solve our most pressing challenges. For investors, the rules open up a wealth of opportunities to make attractive returns while making a difference.”

Encouraging disclosure

The European Commission’s action plan on sustainable finance includes the Sustainable Finance Disclosure Regulation (SFDR), which requires asset managers and financial advisers to inform investors how they integrate sustainability risks and opportunities into their investment decisions and recommendations. The EU is also toughening disclosure standards for non-financial companies under the Corporate Sustainability Reporting Directive.

By requiring companies to generate and disclose a trove of sustainability data, investors can direct capital to firms and projects that are poised to thrive in the shift to a greener, more equitable economy. As part of the framework, the EU Taxonomy — a green classification system — should make a substantial contribution to the EU’s climate and environmental objectives.

Breadth of choice

In addition to the wealth of data the EU framework will generate, it will also give rise to new investment products and opportunities across a range of asset classes as companies move beyond reducing their climate footprint to tackling many of the world’s most pressing issues. Companies are developing innovative solutions from recycling to water purification and energy infrastructure to carbon capture. Beyond climate, increasing emphasis from regulators and investors on social issues will also help spur solutions in areas such as healthcare and education

For investors, this will mean a wider range of stocks that will align with the EU’s Taxonomy. On the fixed-income side, companies will step up issuance of green bonds that meet the EU’s new standards and allow investors to target specific projects. Investors are also likely to play an increasingly important role in alternative finance, providing crucial funding to companies and projects that have traditionally relied on banks.

Setting an example

The impact of the EU framework will be felt far beyond Europe. Heinsbroek says: “The “Brussels effect” has seen countries around the world starting to adopt rules and regulations similar to those in the EU as global best practice. In emerging markets, where many of the countries most vulnerable to the threat of climate change are located, this will mean European investment can flow more freely into these economies and European investors can reap a greater sustainability return.”

Some countries, such as South Korea [3], are already putting regulations in place to boost sustainability. Across the region, regulators and companies are looking at how they could adapt and implement at least some of the EU rules. Many companies in Asia are keen to comply with the EU sustainability framework because it will help them attract investment and improve their performance.Heinsbroek continues: “The framework’s full impact on the sustainable investment market will take time to be realised. While much of the primary legislation is already in place, more detailed rules, known as level 2 legislation, needed to implement the package are still in the works. Nevertheless, the outlook for sustainable investing is clear. Investors who position their portfolios to benefit from the coming changes stand to reap attractive returns over the longer term in addition to making an ever-greater impact in the global effort to build a sustainable future.”

[1] Source: European Green Deal: https://tinyurl.com/v5bhh4cw

[2] Source: European Commission Sustainable Finance Fact Sheet: https://tinyurl.com/eyu47fef

[3] Source: Financial Services Commission: https://www.fsc.go.kr/eng/po060101

 

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