Sustainable finance seems to be in vogue, to the delight of sustainability professionals. It is attracting increasing interest. But what exactly is it? Like all simple questions, it does not have an easy answer. As with Sustainability or Corporate Social Responsibility, there is no clear and generally accepted definition of what sustainable finance is. Finding one is the key to success.
Setting aside the different views of experts, the most relevant definition at present is that of the European Commission (EC), which is exercising the clearest leadership to promote this matter. For the Community Executive, sustainable finance is “the provision of funding for investments taking into account environmental, social, and governance considerations.” Firstly, this definition has a clear ‘green’ component to mitigate the effects of climate change and the entire process of adaptation of companies and citizens to it. Secondly, it has a social component to ensure inclusive development that leaves no one behind. Finally, it has a governance aspect, concerning how companies are organized and held accountable transparently and with a long-term vision when carrying out their activities.
Of these three closely related components of the sustainable finance definition, the environmental or green factor is the one currently driving the most urgent measures in the European Commission’s plan published in March. As a result of this plan, the first four legislative proposals were launched at the end of May, notably including the gradual development of an EU taxonomy, or classification, for climate change and socially sustainable activities, based on the final report of the expert group published in January and other bodies.
The objective is to establish harmonized criteria to clearly determine whether an economic activity or an investment is sustainable, with a common classification across the EU that provides companies and investors with a shared language to identify this sustainability. This is an essential first step in efforts to channel investments and avoid “greenwashing,” which severely damages the credibility of entities strongly committed to this type of financing.
With this purpose, among others, another group of experts has been created to help the Commission develop this taxonomy. However, the financial sector notes a lack of representation from retail and corporate banking within this group, as, in addition to sustainable investment, it is necessary to discuss financing projects. In Europe, 80% of financing comes from banks.
The green agenda is not only gaining relevance in Europe. The new Minister for Ecological Transition, Teresa Ribera, has just announced that she will bring the Climate Change and Energy Transition Law (LCCYTE) – long-awaited by all – to Congress before the end of the year. Although unfortunately, a draft of the law has not yet been seen, it will surely finally establish the targets for reducing greenhouse gas emissions, renewable energy, and energy efficiency; commitments undertaken by Spain in relevant international agreements with the adoption of the UN’s 2030 Agenda and the Sustainable Development Goals (SDGs) and the Paris Climate Agreement.
