{summary#bullet-1}
What is sustainable finance?
Sustainable finance is the application of ESG criteria In the field financier. In other words, environmental, social and governance factors are considered in the investment decision-making process, directing capital to long-term sustainable activities and projects.
European regulations, in particular the SFDR (Sustainable Finance Disclosure Regulation), oblige financial companies such as banks, fund managers and advisors, to make their investments transparent And the assess the impact of their operations, disclosing information on how ESG factors are taken into account in investment choices.
The ESG risk management has become a must for any company that wants to remain competitive and in line with the new regulatory standards. Let's take a closer look at the directives that influence the industry and the solutions that companies can adopt to be compliant.
{summary#bullet-2}
The key regulations: SFDR, PAI and EU Taxonomy
SFDR (Sustainable Finance Disclosure Regulation), which came into force on 10 March 2021, obliges financial companies to provide detailed and transparent information regarding the environmental and social impact of their investments.
The SFDR, in addition, divides the sustainable financial products in 2 main categories:
- Art. 8 products, which promote environmental and/or social characteristics;
- Art. 9 products, who pursue sustainable investment objectives.
This regulatory framework aims to avoid the Greenwashing, promoting greater transparency and clear communication with investors.
I PAI (Principal Adverse Impact) are the possible negative impacts that investments can have on the environment, society and governance.
Gli PAI indicators identified by the European authorities are 64: on 18 financial intermediaries are required to account for these indicators, including the level of carbon emissions (”mandatory disclosure”), while on the others 46 They can proceed on voluntary basis.
Finally, the EU taxonomy provides a clear and uniform classification for economic activities that can be considered sustainable, facilitating the identification of investments aligned with the European Union's climate objectives.
These regulations not only establish common standards for sustainable investments, but they push companies to integrate sustainability into their decision-making processes, helping to make the financial sector more responsible and transparent.
What does it mean for companies?
- Mandatory disclosure: companies must be transparent about their negative impacts and provide detailed reports in line with the SFDR.
- Taxonomy Compliance: only activities considered sustainable according to the European taxonomy can be defined as such in sustainability reports.
- Corporate Responsibility: companies are now responsible for the impacts of their decisions, thus creating an incentive to improve ESG practices.
- Development of sustainable strategies: regulations push companies to develop strategies that minimize PAI and maximize sustainable benefits, encouraging a more proactive approach to sustainability.
- Impact on reputation: companies that do not comply with these regulations may face reputational damage, losing the trust of investors and consumers
{summary#bullet-3}
Managing climate and environmental risks: the Bank of Italy's expectations
The Climate Risk Management has become a priority for companies in the finance sector: climate change and environmental degradation give rise to structural changes that affect economic activity and, consequently, the financial system.
Climate risks fall into two main categories:
- physical risks, linked to the direct effects of climate change (such as extreme weather events);
- transition risks, linked to the transition to a low-carbon economy.
With regard to the management of climate and environmental risks, the Bank of Italy's expectations reflect those dictated by The ECB's guide on climate and environmental risks and from theEBA (European Banking Authority).
These provide clear guidance on how banks should integrate ESG risks into their decision-making processes and supervisory expectations related to risk management.
What can companies do?
- Develop stress test scenarios: banks should use climate stress tests to predict the impact of regulatory and environmental changes.
- ESG Data Collection: Companies must implement effective systems to collect ESG data from their customers and counterparties.
- Integrating ESG risks into management processes: sustainability must become an integral part of risk assessment, not an appendix.
- Full disclosure: provide clear and transparent ESG reports that cover all critical areas of sustainability, from climate risks to social outcomes.
