DeHavilland Briefing

The consulting firm De Havilland issued a comprehensive briefing about Sustainable Finance which gives a good overview of the state-of-play. This is not an ELTI document but might be interesting for “newcomers” in the topic.

Introduction

Sustainability in finance – and considering environmental, social and governance (ESG) issues before investing – has gained traction in the last decade. In 2015, the need for this to happen on a larger scale was formally recognised with the adoption of the UN 2030 Agenda and Sustainable Development Goals and the Paris Climate Agreement. The Paris Agreement, in particular, includes the commitment to align financial flows with a pathway towards low-carbon and climate-resilient development. To achieve the EU’s 2030 targets agreed in Paris, including a 40% cut in greenhouse gas emissions, the European Commission (‘The Commission’) estimates an investment gap of 180 billion EUR per year will have to be filled.

According to the Commission, sustainable finance is the provision of finance to investments taking into account ESG considerations and includes a strong green finance component that aims to support economic growth while also aiming to:

• Reduce pressures on the environment;
• Addressing green-house gas emissions and tackling pollution; and
• Minimising waste and improving efficiency in the use of natural resources.

It also encompasses increasing awareness of and transparency on:

• The risks which may have an impact on the sustainability of the financial system; and
• The need for financial and corporate actors to mitigate those risks through appropriate governance.

Yet, many questions remain open. What exactly is the difference between a “normal” investment and a sustainable investment? Does sustainability in investment know gradations? Do investment firms have to go beyond “negative screening”, i.e. the exclusion of assets deemed unsavoury? How do investments in companies who aim to become more sustainable in the future need to be treated when that particular business is at the moment a polluter?