The European Union (EU) has been a leader in promoting sustainable finance, recognising the need for a comprehensive and cohesive framework to promote responsible investment and financing practices. A report by the EU Court of Auditors, released in 2021, found that more cohesive action is necessary to shift funding towards sustainable investment. This report, entitled “Special Report on Sustainable Financing: More Coherent EU Action is Needed to Redirect Financing Towards Sustainable Investment,” remains relevant today. Despite being released in 2021, the findings and recommendations of the report continue to be important in addressing the ongoing issue of sustainable financing. It is crucial to note the release date of the report, as it may be misleading to present it as a recent document.
The report served as a wake-up call to EU policymakers, regulators, and financial institutions to take a more comprehensive and cohesive approach to sustainable financing.
The report stressed the importance of integrating environmental, social, and governance (ESG) criteria into financial decision-making. This means that investors and financial institutions were expected to consider the long-term impact of their investments on the environment and society.
Since the 2021 EU Court of Auditors Special Report, what has it changed?
This blog post aims to (1) highlight some of the key issues identified in the referred report and (2) critically assess whether policymakers, regulators and financial institutions have acted upon as response.
1. The important lessons from the 2021 EU Court of Auditors’ reports
The report highlighted a lack of consistency across the EU regarding regulations and reporting requirements. This lack of consistency makes it difficult for investors to compare the performance of different ESG investments and for regulators to monitor and enforce sustainable finance regulations.
According to the report “Special Report on Sustainable Financing: More Coherent EU Action is Needed to Redirect Financing Towards Sustainable Investment” released by the EU Court of Auditors, one of the main inconsistencies in the market is the lack of clear definitions and common standards for what is considered sustainable investing. This makes evaluating investments’ environmental, social, and governance (ESG) impacts challenging.
For example, the report states that there is a lack of consistency in how different financial institutions define and measure sustainability, making it difficult to compare and assess the sustainability of different investments.
The report also highlights the lack of transparency and consistent information about the ESG impacts of investments, which makes it challenging to assess the risks and opportunities associated with these investments. This lack of information makes it difficult for investors to make informed decisions about sustainable investments.
In terms of promoting green investments, the report states that financial institutions need more incentives to include ESG criteria in their investment decisions. This would help to allocate resources to sustainable projects and activities such as renewable energy, sustainable transport, and energy efficiency. The report also notes that there is a lack of clear guidelines and standards for what constitutes a “green” investment, which makes it difficult for investors to identify and invest in sustainable projects.
The report also highlights the need for more robust monitoring and enforcement mechanisms to ensure that financial institutions are held accountable for their actions. It suggests that the EU should consider creating an independent body to oversee the implementation of sustainable financial regulations. This provides a more objective and impartial assessment of financial institutions’ actions and would help ensure that sustainable finance regulations are implemented effectively.
In addition to highlighting regulatory challenges, the report also highlights the importance of non-regulatory measures, such as education and awareness-raising, to promote sustainable finance. This includes raising awareness among investors and financial institutions about the risks and opportunities associated with sustainable finance and the importance of integrating ESG criteria into financial decision-making.
It also highlighted the need to adopt a more coherent and consistent EU framework for sustainable finance, including clear and consistent definitions of green investments, robust monitoring, and enforcement mechanisms.
This statement can be confirmed in this passage from the report:
”The Court concludes that more coherent EU action is needed in order to redirect public and private financing towards sustainable investments. While the Commission has focused its actions on increasing market transparency, it has not added measures to address the cost of unsustainable economic activities. Moreover, it needs to apply consistent criteria to determine the sustainability of the investments it supports with its budget and better target efforts to generate sustainable investment opportunities.”
Some of the report’s recommendations include mention of the development of a taxonomy of sustainable investments to define what is considered a sustainable investment and facilitate the assessment of the impacts of ESG investments, as well as the application of regulations to ensure transparency of the impacts of ESG investments and ensure that investors understand the risks and opportunities associated with these investments. There is mention of the urgent need to encourage financial institutions to include ESG criteria in their investment decisions through clear regulations.
Some of these recommendations have already been implemented; for example, the European Union has worked to improve the transparency of sustainable investments, including by defining a taxonomy of
sustainable investments and implementing regulations to ensure that investors understand the environmental, social, and governance impacts of their investments.
2. What has changed after the EU Court of Auditors Report?
The European Union has been increasing the transparency of sustainable investments by encouraging financial institutions to include environmental, social, and governance (ESG) criteria in their investment decisions. The development of new financial instruments such as green bonds (that can be used to channel investments into sustainable projects) and the integration of this “strategic sustainability” investment vision of financial institutions to ensure that investments are aligned with the European Union’s climate and environmental objectives have been crucial.
We note that the European Union is working to define a taxonomy of sustainable investments and implement regulations to ensure that investors understand the environmental, social, and governance impacts of their investments. Indeed, sustainable financing in the EU is an important step forward in the fight against climate change and in promoting responsible investment practices.
With the EU leading the way, other regions are likely to follow suit, and we can expect to see continued momentum towards sustainable finance in the coming years.
Even so, sustainable finance is still in its youth, and there is still a long way to go before it becomes the norm. The EU and its member states need to continue working together to create a comprehensive and cohesive framework for sustainable finance that will truly make a difference. The future of finance is sustainable, and it is time to start “green” investing.
In conclusion, sustainable finance is no longer an option; it is a necessity. The EU has set ambitious goals for the transition to a low-carbon economy, and green investments are seen as a key part of achieving these goals.
