Sustainable investments
What are sustainable investments?
The landscape of sustainable investments is dynamic and fast evolving. There is a proliferation of diverging definitions, both market-led and in regulatory frameworks. These range from flexible approaches covering a wide range of objectives to more restrictive and stringent strategies.
Please find below an overview of the sustainable investment definitions stemming from the EU rules and an overview of the Eurosif conceptual framework.
Sustainable investments in the EU regulatory framework
Two main EU regulations defining sustainable investments are the EU Taxonomy Regulation and the Sustainable Finance Disclosure Regulation (SFDR).
SFDR
SFDR creates a sustainability-related disclosure framework for financial market participants (FMPs) and financial advisers with regards to the integration of sustainability risks and the consideration of adverse sustainability impacts in investment processes. This includes entity-level and financial product-level disclosures, which must be included in precontractual and periodic documentation as well as on financial market participants’ websites.
Article 2.17 of the Sustainable Finance Disclosure Regulation (SFDR) defines sustainable investments as “investments in an economic activity that contribute to an environmental or social objective, provided that such investments do not significantly harm any other environmental or social objectives and that the investee companies follow good governance practices”.
Financial products with sustainable investments as their objective must follow specific disclosure requirements laid out in SFDR Article 9 and Article 11. This includes assessing their overall sustainability-related impact using relevant sustainability indicators. This also entails transparency on the adverse impacts of the product on environmental, social or governance issues (“Principal Adverse Impacts”, PAIs) which are used by FMPs to determine whether an investment does not significantly harm any other environmental or social objectives. SFDR Article 8 describes the transparency requirements for products with environmental or social characteristics, which includes disclosing their share of sustainable investments.
The European Commission and the European Securities Markets Authority (ESMA) also published Q&As to assist market participants in the implementation of SFDR and clarify its interactions with other EU regulations. These Q&As are integrated in a consolidated document accessible on ESMA website..
While the SFDR and its definition of sustainable investments has been a major step forward in improving transparency, driving convergence, and creating a common understanding, much is still left to the interpretation by financial markets participants. As part of the review of SFDR, expected in 2025, Eurosif proposes to establish minimum science-based criteria and disclosure requirements to define financial products with a sustainable investment objective.
EU Taxonomy Regulation
The EU Taxonomy Regulation, defines environmentally sustainable economic activities, and creates a transparency framework for companies in the scope of the Corporate Sustainability Reporting Directive (CSRD) to disclose their alignment with these activities. It aimed at creating a science-based framework to define environmentally sustainable investments and help channel investments into environmentally sustainable economic activities and projects.
The Taxonomy Regulation defines “environmentally sustainable investments” as investments in one or several economic activities that qualify as environmentally sustainable under the Regulation. To do so, these economic activities must meet the following criteria:
- Contribute substantially to one or more of the environmental objectives set out in the EU Taxonomy: climate change mitigation; climate change adaptation; the sustainable use and protection of water and marine resources; the transition to a circular economy; pollution prevention and control; the protection and restoration of biodiversity and ecosystems.
- Do not significantly harm any of these environmental objectives.
- Be carried out in compliance with the minimum social and governance safeguards, for which the Platform on Sustainable finance provided the guidance.
- Comply with the Technical Screening Criteria (TSC) of the Taxonomy.
These Technical Screening Criteria are laid out in the Taxonomy Regulation’s Delegated Acts:
Articles 5 and 6 of the Taxonomy Regulation provide additional disclosure requirements for financial products under the scope of SFDR which have environmentally sustainable investments as their objective or that promote environmental characteristics. This entails disclosing their share of investments going towards activities qualifying as environmentally sustainable under the Taxonomy.
Article 8 of the Taxonomy Regulation also entails additional disclosure requirements for companies under the scope of the Corporate Sustainability Reporting Directive (CSRD) to disclose their alignment with the Taxonomy. These requirements are detailed in their own Delegated Act:
The EU Taxonomy is a useful science-based tool to assess the environmental sustainability of economic activities. However, its consistency and coherence with other pieces of EU regulations, including SFDR, should be improved. In the mid to long-term, the Taxonomy should be further developed to cover always significantly harmful (red) and intermediate activities (amber) activities, distinguishing between harmful activities that can and cannot be transformed. This approach was suggested in a report from the European Commission’s Platform on Sustainable Finance.
Eurosif’s methodology to classify sustainability-related investments
Eurosif, in collaboration with Prof. Timo Busch from the University of Hamburg and AIR – Advanced Impact Research, published a report presenting a conceptual framework to classify sustainability-related investments. This methodology recognises the evolving nature of the market and proposes four distinct categories of sustainability-related investments that reflect on the investments’ ambition level to actively contribute to the transition towards a more just and sustainable economy.
Eurosif’s methodology is based on the sustainability-related investment approaches set out in a report by the Global Sustainable Investment Alliance (GSIA), in cooperation with the CFA institute and the Principles for Responsible Investment (PRI):