The Sustainable Finance Disclosure Regulation, which was introduced by the European Commission alongside the Taxonomy Regulation, has now become a reality. It’s part of the legislative measures, arising from the European Commission’s Action Plan on Sustainable Finance. Mandatory ESG disclosure obligations are now imposed for asset managers and other financial markets participants in order to direct private capital towards sustainable investments.
According to Morningstar, assets in European sustainable funds rose by 55% and 505 new “sustainability”-focused funds were launched in 2020. This strong demand for ESG funds has exacerbated the lack of transparent data and the new package of rules will be crucial for European Union to tackle greenwashing and meet its 2050 net zero goals.
Greenwashing is when a fund misleadingly labels itself sustainable to attract environmentally minded investors causing potential reputational damage for both lenders and borrowers. Moreover, it undermines the integrity of green or sustainability linked loans.
The main step to tackle greenwashing issues and a key part of the new regulation, is the classification of funds. Asset managers must now decide whether a fund they offer fits in one of the three sections: Article 6, Article 8 and Article 9.
- Article 6 is for regular funds
- Article 8 promotes environmental or social characteristics
- Article 9 must have a sustainable investment objective, including any fund tracking the Paris Aligned Benchmark or a Climate Transition Benchmark
This classification is considered an important milestone in sustainable finance.
The demand for ESG funds is only going to increase as the new EU legislation aims to drive 1 trillion euros ($1.19 trillion) into green investments over the next decade. Companies have to adapt soon and there is no more space for confusion.
These key topics, trends and new challenges, caused by the new legislative requirements, are covered in CSE’s upcoming three-day Certified Sustainability (ESG) Practitioner Program, Advanced Version, on June 24-25 & 28, specially designed for C-level Executives. The program provides a unique recognition in the Sustainability and ESG field.