Sustainable Finance Regulation in the European Union

As public awareness of sustainability issues grows and the critical role of finance in driving sustainable development becomes increasingly clear, understanding the mechanisms behind sustainable finance is more relevant than ever. Governments, corporations, and individuals are recognizing that financial practices must evolve to address environmental challenges and promote long-term economic sustainability. This book offers a comprehensive look at sustainable finance within the European Union, exploring the detailed regulations and practices that guide its shift toward a more sustainable economy. It unfold the EU’s complex sustainable finance framework, presenting the key strategies, regulatory achievements, and important agreements that define its progress. The book is divided into three carefully structured parts, each contributing to the intricate tapestry of regulations and practices that are steering the transition towards a greener economy.

Sustainable development has long been at the heart of the European Union (EU) agenda. The EU is committed to development that meets the needs of the present without compromising the ability of future generations to meet their own needs. At the end of 2016, the European Commission (EC), the EU’s executive arm, appointed a High-Level Expert Group on sustainable finance, which built the ‘Sustainable Finance’ (SF) strategy. SF generally refers to environmental and social considerations in investment decision-making towards increased investments in longer-term and sustainable activities. This chapter aims to describe the evolution and changes of the European Sustainable Finance Strategy over the years. It opens by reviewing the two leading events that initiated the EU strategy—the Paris Agreement and the 2030 Agenda for Sustainable Development. It discusses the importance of financial systems, focusing on sustainable finance. It then details the Action Plan on Financing Sustainable Growth, and the Sustainable Finance Framework established in 2018, constituting the EC’s initial strategy, the European Green Deal (2019), and the EC’s renewed sustainable finance strategy (2021). The chapter ends with a discussion of the 2023–2028 strategy of the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, which aims to ensure that the financial markets support and promote the EU priorities, specifically those at the chore of this chapter.

This chapter discusses the EU’s Sustainable Finance Framework to date, reviewing the regulations, tools, and standards developed over the years to enable the implementation of the EU’s sustainable finance strategy described in Chap. 2. The essence of the EU Sustainable Finance Framework is to channel private investments toward sustainable projects. The chapter starts with the taxonomy regulation, presenting the six climate or environmental objectives and the four overarching conditions that economic activity must meet to qualify as environmentally sustainable. Next, the EU Taxonomy contribution and EU Taxonomy Navigator tool are discussed. The second part of the chapter presents the Disclosure Regulation, specifying the different stakeholders for each regulation: The issuers (CSRD), the market participants, and the financial advisers (SFDR; MiFID II and IDD). The chapter’s last section presents the relevant tools and standards, including a description of the EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks, and the European green bond standard. This EU Sustainable Finance Framework is essential to realizing the EU’s commitment to sustainable development, specifically in the financial systems. In addition to the regulations, it provides guidelines and tools for the EU member states to enable the implementation at the local level. It leads to the achievement of economic growth and a more sustainable world. The following chapters present the framework implementation in five EU members: Spain, Italy, Germany, Estonia, Netherlands, as well as Israel.

Spain is expected to be one of the EU countries suffering more from global warming. Public opinion has been deeply concerned for a long time, but government action in aligning financial flows with investment goals compatible with the Paris Agreement has recently increased. This chapter reviews recent laws in Spain connected to sustainable finance and the reports that Spanish financial supervisors have published on this topic. The main challenges observable in Spain are discussed, together with some areas for further development, such as aligning taxation in the financial industry with sustainability.

In the Italian context, sustainable finance has had very significant expansion in recent years to the cultural change underway and to structural regulatory and market changes. On the one hand, greater awareness has developed of the positive role that finance may have in mitigating external adverse impacts on the environment and society caused by economic activities, also thanks to the strong influencing action of European Regulations. On the other hand, non-financial information has become more structured, allowing sustainability ratings to be built thanks to the enactment of regulations that make ESG disclosure mandatory for an increasing number of companies.

Sustainable finance (SF) in Germany is a multifaceted and collaborative endeavor driven by key stakeholders and regulatory bodies. Institutions like BaFin, the Federal Financial Supervisory Authority, are pivotal in overseeing and enforcing sustainability regulations. They ensure financial institutions integrate environmental, social, and governance (ESG) factors into investment and risk management processes, safeguarding market integrity and investor interests. Alongside BaFin, the KfW Bank (Credit Institute for Reconstruction) supports and promotes impact investments, fostering positive social and environmental outcomes. Additionally, the Federal Ministry of Finance collaborates with various stakeholders to develop policies and regulations that encourage sustainable financial practices, aligning with European Union initiatives and the Paris Agreement to integrate sustainability into the financial industry. Germany’s sustainable finance trajectory remains promising. It anticipates a deeper integration of sustainability criteria into financial practices and alignment with EU sustainability initiatives. Opportunities for improvement include refining the measurement and reporting of environmental and social impact, enhancing transparency in sustainable investment products, and incentives for private sector investments in green and socially responsible initiatives. Moreover, the sector will focus on better integrating sustainability considerations into risk management processes and addressing uncertainties in risk assessment. Implementing these recommendations will solidify Germany’s position as a leader in sustainable finance, align with global sustainability goals, and promote a more environmentally and socially responsible financial sector.

Estonia is currently in the initial stages of integrating sustainable finance practices. This transition is primarily driven by European Union-wide regulations rather than Estonia’s national policies. This chapter focuses on the Republic of Estonia’s unique environmental, social, and economic attributes. It provides a comprehensive overview of its key financial institutions, state support mechanisms, and specific financial tools to foster sustainable development in alignment with the Green Deal. It also highlights a European Union-funded research project under the Technical Support Instrument (TSI), which proposes the establishment of a Knowledge Hub in Estonia. This hub is intended to facilitate expert discussions and foster consensus on effective implementation strategies for sustainable finance. The chapter subsequently identifies the primary challenges Estonia faces in this area and concludes with a discussion of the main recommendations for advancing sustainable finance practices in the country.

New EU transparency and conduct of business regulations have placed the Dutch Authority for the Financial Markets (AFM) in the position of a supervisor rather than a regulator. While sustainability was not a core part of AFM’s strategy at the onset of the 2020s, it has become one of its priorities, especially due to rising investor demand in a country that is exposed to unique climate risks and hosts a strong financial sector. As AFM built its capacity, its early focus has been on surveying market trends and providing guidance to the market, particularly due to the implementation challenges entailed by SFDR and the CSRD. The AFM has also sought to support the development of EU regulation, often jointly with the French regulator. Increasingly, the AFM is turning towards enforcement, notably to prevent greenwashing and risk management, as physical and transition risks become more evident. Still, the AFM’s cautious approach to sustainable finance contrasts highly with the pioneering role of the Dutch Central Bank, De Nederlandsche Bank, its counterpart in prudential regulation.

The chapter on sustainable finance development in Israel offers a comprehensive exploration of Israel’s distinctive journey towards sustainability. Fueled by its inherent needs, scarcity of natural resources, and a collective spirit of nation building, Israel has forged a remarkable path in sustainable finance. The chapter sheds light on the pivotal role the European Union (EU) played in influencing sustainability practices beyond its borders. It underscores the significance of the EU’s impact on non-European nations, emphasizing its initiatives’ global triple effect (Environment, Social, Governance). This chapter provides valuable insights into how Israel’s unique context has shaped its approach to sustainable finance and integration into the broader international landscape. The process in Israel is still in preliminary transition and is shaped by three central authorities: the Central Bank, Capital Market, Insurance and Savings Authority, and Securities Authority.

Sustainable finance and community involvement are deeply interconnected. Financial systems prioritizing sustainability must inherently value social inclusion and community participation to address socioeconomic disparities and ensure long-term holistic growth. The chapter provides an overview of why social inclusion and community involvement are essential for sustainable finance and presents the current body of research in the field. To demonstrate how community involvement and social inclusion can be practically implemented, examples from the kibbutz in Israel and the case of the Mondragon cooperative are analyzed. The challenges to obtaining higher community involvement and policy implications are presented. Social inclusion and community participation align with the UN SDGs, particularly those related to reducing inequality and promoting inclusive and sustainable economic growth. Financial institutions should prioritize and invest in platforms that allow for robust community engagement, ensuring that diverse voices are heard and integrated into decision-making processes.

This chapter provides a compelling synthesis of the journey undertaken throughout the book. It distills the main findings and insights discussed in previous chapters, culminating in a comprehensive overview of the sustainable finance landscape. This chapter reaffirms the pivotal role of sustainable finance regulation within the unique contexts of the countries examined and its broader alignment with the EU framework. By threading together the intricate threads of regulatory frameworks, cross-country comparisons, challenges, opportunities, and the trajectory of sustainable finance, this chapter offers a reflective vantage point. It reinforces the imperative for ongoing collaboration, innovation, and adaptation to steer towards a future that harmonizes sustainability goals with financial resilience, echoing the resounding significance of this collective journey in advancing sustainable finance in both national and international arenas.