Everything you need to know about sustainable finance regulations in Europe

What is sustainable finance?

Banque de France defines sustainable finance as all financial activities aimed at improving the interests of the community over the long term. It also distinguishes between three different practices: green finance, solidarity finance and responsible finance.

Green finance covers all financial operations aimed at promoting the Energy and Ecological Transition and preventing the environmental damage that can arise from economic activities, particularly those of companies and financial players.  

The most important global milestone is the Paris Agreement, which was agreed at COP 21 in Paris in 2015 and came into force in 2016, committing every country to contain global warming to well below 2°C above pre-industrial levels by 2100, and to continue efforts to limit the rise in temperatures to 1.5°C.

Following this agreement, the European Union put in place an elaborate framework that constitutes its European "Green Deal". This Green Deal, announced in 2019, sets targets and the means to achieve them. The European Commission's objective is to rapidly direct investment towards a zero-carbon economy, resilient to climate change, by 2050.

Find out more about the European Green Deal - Consilium (europa.eu).

What are the current regulations on sustainable finance?

The main regulations on sustainable finance are:

• EU Regulation 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability disclosures in the financial services sector (known as the SFDR or Disclosure Regulation).

• EU Regulation 2020/852 of the European Parliament and of the Council of 18 June 2020 (known as the Taxonomy Regulation) establishing a framework to facilitate sustainable investment and amending EU Regulation 2019/2088.

• The European Non-Financial Reporting Directive (NFRD), which currently governs non-financial performance reporting by European companies, has been replaced by EU Directive 2022/2464, the Corporate Sustainability Reporting Directive (CSRD), which will apply progressively from 1 January 2024.

Other regulations have been amended to introduce sustainability criteria, in particular:

• The Benchmark Regulation: Two new categories of low-carbon indices were introduced in 2019: Climate Transition Benchmarks (CTB) and Paris-Aligned Benchmarks (PAB).

• MiFID II: intermediaries offering investment advice or a portfolio management service have been obliged since 2022 to collect their clients' sustainability preferences before offering them a financial investment.

• The AIFM Directive and the UCITS Directive: the delegated acts require all UCITS management companies and AIF managers, whether or not they have an ESG-related investment strategy, to integrate sustainability risks into the management of a fund.