What is sustainable finance?
Sustainable finance refers to the process of taking environmental, social and governance (ESG) considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects. Environmental considerations might include climate change mitigation and adaptation, as well as the environment more broadly, for instance the preservation of biodiversity, pollution prevention and the circular economy. Social considerations could refer to issues of inequality, inclusiveness, labour relations, investment in people and their skills and communities, as well as human rights issues. The governance of public and private institutions– including management structures, employee relations and executive remuneration– plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.
In the EU's policy context, sustainable finance is understood as finance to support economic growth while reducing pressures on the environment to help reach the climate- and environmental objectives of the European Green Deal, taking into account social and governance aspects. Sustainable finance also encompasses transparency when it comes to risks related to ESG factors that may have an impact on the financial system, and the mitigation of such risks through the appropriate governance of financial and corporate actors
Why is sustainable finance important?
Sustainable finance has a key role to play in delivering on the policy objectives under the European green deal as well as the EU’s international commitments on climate and sustainability objectives. It does this by channelling private investment into the transition to a climate-neutral, climate-resilient, resource-efficient and fair economy, as a complement to public money. Sustainable finance will help ensure that investments support a resilient economy and a sustainable recovery from the impact of the COVID-19 pandemic.
The European Union strongly supports the transition to a low-carbon, more resource-efficient and sustainable economy and has been at the forefront of efforts to build a financial system that supports sustainable growth.
What is transition finance?
Sustainable finance is about financing both what is already environment-friendly today (green finance) and what is transitioning to environment-friendly performance levels over time (transition finance). Transition finance is about financing private investments to reduce today’s high greenhouse gas emissions or other environmental impacts and transition to a climate neutral and sustainable economy. For instance, these could be investments in green production methods or reducing the environmental footprint as far as possible, where no green technologies are yet available. Transition finance is urgently needed to reduce greenhouse gas emissions by 55% and our environmental impact by 2030. It is often needed by companies that want to become sustainable but need to do so in steps over time - in other words, companies with different starting points that want to finance their journey towards a sustainable future.
On 13 June 2023, the Commission issued non-binding recommendations on how non-financial and financial companies can voluntarily use EU sustainable finance tools to seek or provide transition finance. The EU’s sustainable finance toolbox not only supports companies with the highest sustainability records, but also companies with different starting points that have clear sustainability targets. It also allows smaller companies to raise finance for their transition in a proportionate way.
