What is the objective of sustainable finance and what to do to build a sustainable investment portfolio
What is the sustainable finance action plan and what is its goal
The action program includes 17 goals for sustainable development to be met in the environmental, economic, social and institutional spheres by 2030.
In order to achieve this goal, the EU Commission has estimated annual investments of about 520 billion euros, for which the mobilization of private as well as public resources is necessary. This is another reason why the need for greater sustainability in the way we do business is becoming increasingly clear, hence the idea of "sustainable finance."
Sustainable finance: the mission
The mission is to make it possible for any company, bank, insurance company or individual investor to pursue their financial interests without harming the well-being of the planet and society by building sustainable investment portfolios.
This would allow finance to be directed in favor of projects that certify positive environmental and social impacts, so as to speed up and support sustainable development.
Just to help you understand how to pursue your financial interests without harming the planet, the Up2You Insight team has put together a guide to summarize the EU regulations promoted in favor of sustainable finance and clarify how banks and other financial institutions play a key role in this transition, so you can take part in the change that is already underway.
Click here and download the free guide
Sustainable finance: what are the incentives
In the latest annual reports of market risks and vulnerabilities prepared by leading financial analysis authorities such as the Fed and ESMA, climate change has emerged as a central element. In 2019, the European Commission also committed to a new development strategy called the Green Deal, with the aim of making Europe the first net-zero-emissions continent. To achieve this goal, it has adopted three major incentives toward sustainable finance:
- Taxonomy;
- Sustainable Finance Disclosure Regulation - SFDR;
- Corporate Reporting of Sustainability - CSRD.
These directives operate on the duties that individual companies and financial players are required to complete in order to make the market transparent, increasing quantity, quality and comparability of information through a clear and shared classification system.
These 3 directives are specifically addressed in our comprehensive guide on sustainable finance, where we delve into the objectives of the directives, who they address, and what is required of companies. Click the link below and download it for free!
Sustainable finance: the proposal of the European Parliament
In summary, the transition that the European Union is striving for is to evaluate companies not only by their economic and financial performance, but also by their sustainability performance through a shared ranking system.
On the other hand, the action plan envisioned for the European goals in the future will not only be about communication, but will increasingly include analysis of the concrete actions of individual companies.
A clear example of this is the internal proposal in the European Parliament on "due diligence" for sustainability that is on its way to approval, relating not only to information obligations but also to management obligations.
What does the proposal include?
The draft law provides for a ban in entering into contractual relationships with suppliers that do not observe the sustainability parameters expressed in it. So, if business models influence and are influenced by policies that are increasingly oriented toward sustainability and reporting on their implementation, it is important to keep up with these changes. How?
- As individual investors, it is critical to direct your investments toward entities that prove to be efficient and up-to-date on ESG commitments to avoid future risk exposure.
- As entrepreneurs, map out in the immediate future a plan of action that is in step with current regulations and includes setting achievable goals. The first step in this direction is to carefully define safe and recognized methodologies for stipulating the corporate sustainability report.
- As financial companies, understand their role within the ongoing transition and move early to be able to take full advantage of the opportunities for concrete engagement in sustainable development.
Environmental sustainability: the key role of the banking sector
As stated earlier, there are two trends facing today's market:
- the increasingly tangible effects of climate change on the financial system;
- An accelerated transition of national and international policies to better sustainability performance.
In both cases, banking institutions have a central role to play: both one of responsibility to the global community in promoting and accelerating the transition, and one of taking advantage of the opportunities offered by new regulations.
What financial institutions must keep in mind is that current sustainability standards will not go away, but, on the contrary, will become increasingly stringent. Achieving these goals as quickly as possible and anticipating trends is not only a competitive advantage, but the correct way to position oneself as a key player against the advancing climate crisis.
But how to translate this will into practice?
Banking and climate change: building a sustainable investment portfolio
The best strategy for a banking institution to deal responsibly with climate change is to calculate the emissions of its investment portfolio, that is, the amount ofCO2 released by the set of assets in which it has decided to invest. In these cases, in technical terms we refer to the Scope 3 calculation. This allows for more benefits:
- assess the financial risk associated with the companies that the individual entity invests in, ensuring that they are consistent with the various standards. In this way, they will not be subject to future regulatory obligations and will not face additional costs to reduce their emissions;
- be able to set improvement goals, thus going on to build an increasingly high-performing and secure portfolio over time;
- demonstrate its commitment to the transition to a low-carbon economy, so as to increase the confidence of customers, investors and the public, facilitating the building of a solid and sustainable reputation.
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