Sustainable finance

Over the past five years there has been a considerable increase in legal and regulatory initiatives put forward by the European Union to connect finance with sustainability and to tackle the climate crisis. The EU is often considered – and strives to be – at the forefront of international efforts to combat climate change and in developing a financial system that can support and promote sustainable growth. Today the European Union is strongly promoting the shift to a modern, resource-efficient and competitive economy.

The shift, needed to achieve the EU’s climate and sustainability objectives, requires finance to play a critical role: channelling investment towards sustainable economic growth and funding the transition.

Since 2018, the European Commission has been implementing a threefold sustainable finance strategy, aiming (i) to reorient capital flows towards a more sustainable economy, (ii) to mainstream sustainability into risk management, and (iii) to foster transparency and long-termism. Important parts of the EU sustainable development policy agenda include the EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR). 

This regulatory trend has been further accelerated following the announcement of the European Green Deal by the European Commission, setting the objective for the EU to become the first climate-neutral continent by 2050.

Following the Commission’s revision of its sustainable finance strategy, 2021 witnessed a number of important new initiatives to help improve the flow of money towards financing the transition. For example, the non-financial reporting framework for corporates has been revisited, including an expanded scope capturing more companies and clearer standards to ensure that reliable and comparable sustainability information is provided by companies.

More recently, in February 2022, the Commission tabled a corporate sustainability due diligence proposal – a new initiative which focuses on supply chain due diligence, whereby companies in the EU will have to perform audits of due diligence over their supply chain, addressing ESG-related issues.

How does it affect private equity?

Given its business model focused on long-term and active ownership, private equity as an asset class is particularly well suited to integrating and managing ESG matters. As such, the industry can play a crucial role in helping the EU achieve its sustainability goals. However, regardless of the laudable aims of this ambitious EU work-stream, the outcome of measures may have a very broad (and sometimes disproportionate) impact, and affect a wide range of regulatory files of direct relevance for private equity managers and institutional investors.