28 October 2020
Climate change, demographic shifts and the technological revolution are reshaping our planet, our values and the way we invest. Amidst these changes, the financial system is called to play a leading role as we move towards a more sustainable economy centred around ESG issues.
This is why the delegates from the 195 countries participating in the Paris climate conference (COP21) at the end of 2015 signed a climate change agreement committing to a more sustainable economy and society.
However, if investments remain at current levels, we will not reach the targets of the Paris Agreement by 2030. To bridge the gap, private investors must also invest in sustainability.
The sustainable finance market
According to the most recent Global Sustainable Investment Review, the global market of socially responsible investments is worth an astronomical $30.7 trillion. 2018 data are up 34% on 2016. Most countries have implemented strategies to help transition the global economy towards a more sustainable model. Europe still ranks first in the world with $14 trillion in sustainable investments, a segment that has shown double-digit growth and accounts for nearly 50% of all investments.
Millennials may also be driving the growing interest among private investors in sustainable finance, with 93% of millennials considering positive environmental and social impact a fundamental aspect in their investment decisions.
There were 288 sustainable funds in Italy at 31 December 2018 (compared to 120 in 2008), managed by 70 local and international managers (versus 40 in 2008) with AUM of nearly € 64 billion, in addition to the € 5 billion of sustainable ETFs.
With more engagement on sustainability issues and greater transparency, financial players will be in a position to drive the development of SRIs, exploiting vast unexpressed potential and ensuring the effective penetration of these instruments in the asset allocation of portfolios.
The EU’s financial strategy
In December 2016, the European Commission set up a High Level Technical Expert Group on Sustainable Finance (“HLEG”) to develop an EU strategy for sustainable finance.
On 8 March 2018, the Commission published an action plan to finance sustainable growth and help achieve the climate change targets of the Paris Agreement and the sustainable development objectives indicated in the Commission’s document. Specifically, the European Commission’s action plan sets three overall objectives:
- Reorienting capital flows towards a more sustainable economy;
- Mainstreaming sustainability into risk management;
- Fostering transparency and long-termism.
This is leading to the emergence of a new European legal framework increasingly centred around discussion between intermediaries, asset managers and investors.
The European Commission’s Action Plan on Financing Sustainable Growth sets out ten key actions to reorient capital flows towards a more sustainable economy:
- Establishing a unified classification system for sustainable activities;
- Creating standards and labels for green financial products;
- Fostering investment in sustainable projects;
- Incorporating sustainability in financial advice;
- Developing sustainability benchmarks;
- Better integrating sustainability in ratings and market research;
- Clarifying asset managers’ and institutional investors’ duties;
- Introducing sustainability in prudential rules;
- Strengthening sustainability disclosure and accounting rule-making;
- Fostering sustainable corporate governance and attenuating short-termism in capital markets;