Accelerating the energy transition: The evolution of European Sustainable Finance Regulations

Going forward, Sustainable Finance will be subject to an enhanced European regulatory framework, with the aim of encouraging investors and companies alike to ramp up the transition to an economy that incorporates the environmental and social impacts of its activities

The entry into force of the Sustainable Finance Disclosure Regulation (SFDR) on 10 March 2021 is part of a broader movement to develop sustainable finance in Europe. The goals set for Europe are ambitious and call for a prompt, robust effort from all economic players to successfully bring about the energy transition of our economies: limiting CO2 emissions by at least 40% by 2030 (compared to 1990 levels) and achieving carbon neutrality by 2050. However, the European Commission has estimated the investment deficit that needs to be filled in order to meet the 2030 goal would require additional investments of €260 billion per year by 20301.

With this in mind, the Commission adopted the Action Plan for Financing Sustainable Growth in spring 2018, with the ambition of defining a regulatory framework encouraging sustainable investments. This framework will incorporate sustainability as a criterion for risk management and will promote transparency on the negative impacts resulting from decisions to invest in non-sustainable activities. As a result, the European Taxonomy Regulation will establish a classification system for activities compatible with the environmental goals set for the EU. It will also require companies with more than 500 employees, major banks and insurance companies to disclose quantified indicators on their contribution to the goals of reducing and adapting to climate change from 1 January 2022.

Pending the implementation of the new taxonomy, the transparency obligation imposed on financial product managers by the SFDR will help investors identify and compare the environmental and social objectives of funds sold in Europe. For “Article 8” products (products promoting environmental or social characteristics) and “Article 9” products (products with sustainable investment objectives), investors will have information at their disposal allowing them to gauge the negative environmental impacts and the resulting effects on the profitability of their investments.

Accessibility and quality of data

The quality of ESG data provided by companies, and the accessibility of such data, is becoming a key objective in the interest of meeting these new transparency obligations. The Commission has also planned to establish a European Single Access Point (ESAP) for financial and non-financial information pertaining to the companies of all member states, via a dedicated portal, by the second half of 2021. Moreover, the regulatory framework currently being set up will continuously strengthen the standards imposed on companies, with the upcoming review of the Non-Financial Reporting Directive (NFRD). Shareholder pressure is another potential source of influence to encourage companies to adopt resolutions aiming for compliance with ESG criteria.

Rather than systematically imposing sanctions, companies need guidance in adapting their business model to find the financing solutions necessary for a successful transformation. This is why we at BNP Paribas Group strive to help our customers as best we can in their own efforts to combat climate change, by providing them with the benefit of our expertise and offering a wide range of solutions.

With the United States rejoining the Paris Agreement, we are seeing greater awareness of what is at stake from the world’s top decision-makers. Sustainable Finance has the potential to play a major role in steering investment capital towards companies and organisations making a real contribution to the advent of a carbon-neutral economy.