The ESG Investing and ESG Metrics Integration into investment and corporate strategy becomes the new mainstream for investors and corporates especially in EU but also across the globe too. Climate Change as a financial risk for investors and corporates, the binding Paris Treaty for a transition towards a low carbon economy, the binding goal of EU to become CO2 neutral latest till 2050, the binding EU Directive for Non - Financial Disclosure (EU 2014/95) and the recent EU Taxonomy Regulation (EU 2020/852) both applying to more than 6.000 corporates across EU, the binding SFDR EU Regulation (EU 2019/2088) applying to a great number of asset managers, asset owners, Banks, Insurances, Private Equity Funds, Venture Capital Funds across EU and last but not least the rising demand from investors towards corporates for more ESG metrics, confirm the gradual switch of ESG from a niche to mainstream issue and from a voluntary based topic to an important finance compliance topic.
The EU Legal Framework on Sustainable Finance consists of 3 main legally binding texts:
The EU NFR Directive EU 2014/95: It applies to all EU based listed on stock exchange companies with more than 500 employees (in few EU countries the number of employees is lower) and more than 20 million turnover as well as for banks and insurances even if they are not listed. They should disclose every year all relevant firm’s non-financial (sustainability) information as part of their annual sustainability report or of ther Board Management Report - NFR EU Directive 2014/95.
The EU Taxonomy Regulation (EU 2020/852): It came into force on 12.7.2020 and it is mandatory from 1.1.2022 onwards for all companies to which the above mentioned EU NFR Directive applies, meaning all EU based listed on stock exchange companies with more than 500 employees (in few EU countries the KPI number of employees is lower) and more than 20 million turnover per year as well as for banks and insurances even if they are not listed. EU Taxonomy is a classification system, establishing in EU a list of environmentally (and socially) sustainable economic activities based on concrete screening criteria. It contributes to the EU’s strategic goal to become CO2 neutral latest by 2050 - EU Taxonomy Regulation.
The EU SFDR Regulation (EU 2019/2088): It defines harmonised rules for financial market participants (investors, insurances, banks, advisers) regarding their obligation to disclose sustainability risks, adverse sustainability impacts in their processes and the provision of sustainability‐related information with respect to their financial products - SFDR Regulation.
The EU Taxonomy Regulation (which is the continuity of the EU NFR Directive and the next step) was developed among other reasons to:
Develop a concrete and harmonized among EU member states, sustainability classification system, based on concrete Environmental & Social principles and objectives, and defining concrete sectors, which are environmentally and socially relevant, and with positive impact based on specific criteria.
Contribute to a more sustainable and climate friendly economy.
Mitigate climate change and contribute to the strategic goal of EU of to become CO2 neutral by 2050.
Give incentives, tools and metrics to investors to invest in sustainable firms and projects.
Prevent Green-Washing and protect investors and consumers from it.
Help companies to integrate ESG metrics into business model and strategy,
Help shift investments in the sectors, which will have positive sustainability and environmental impact in the European economy.
Makes EU a leader in ESG and sustainability standards and a role model for other regions and countries.
The 6 Environmental Objectives of EU Taxonomy Regulation
Substantial contribution to climate change mitigation: Article 10.
Substantial contribution to climate change adaptation: Article 11.
Substantial contribution to the sustainable use and protection of water and marine resources: Article 12.
Substantial contribution to the transition to a circular economy: Article 13.
Substantial contribution to pollution prevention and control: Article 14.
Substantial contribution to the protection and restoration of biodiversity and ecosystems: Article 15.
The 3 Principles of EU Taxonomy Regulation
The Substantial Contribution to at least one of the above six objectives Principle: Article 16: Enabling activities.
The Do No Significant Harm (DNSH) to any of the other five objectives Principle: Article 17: Significant harm to environmental objectives.
The Comply with minimum safeguards Principle: Article 18: Minimum Safeguards.
The 3 EU Taxonomy Regulation Ratios to comply with
Break down of EU Taxonomy eligible, transition, enabling activities (taking also into account the “Substantial Contribution” in at least one out of the six Environmental Objective and the “DNSH” ” in at least one out of the six Environmental Objective and Principles) as percentage / proportion of the annual turnover of the company.
Break Down of EU Taxonomy eligible, transition, enabling activities (taking also into account the “Substantial Contribution” Principle in at least one out of the six Environmental Objective and the “DNSH” Principle and the Minimum Safeguards Principles) as percentage / proportion of the CapEx of the company.
Break Down of EU Taxonomy eligible, transition, enabling activities (taking also into account the “Substantial Contribution” Principle in at least one out of the six Environmental Objective, the “DNSH” Principle and the Minimum Safeguards Principles) as percentage / proportion of the OpEx of the company.
EU Taxonomy will change the way corporates gather, analyse, evaulate and disclosure ESG Data & Metrics and the way they conduct and disclosure their annual sustainability report. The sustainability report from now one needs to have very concrete ESG data, ESG KPIs and ESG Risks and also very concrete quantitative and annually calculated ESG KPIs. Moreover the investors are from now on obliged to request, analyse, evaluate the ESG Metrics of the corporates in which they are investedor willing to invest and ESG Performance of Corporates will be a factor for investment or dinvestment and for Investors ESG Metrics will be an important KPI for their performance too.
The recent EU SFDR Regulation defines how financial market participants must integrate environmental, social or governance (ESG) metrics (ESG risks and opportunities) in their strategy, processes, products. It also sets unified rules on how those financial market participants should inform about their compliance with ESG in order to avoid Greenwashing. Following are the main pillars of the EU SFDR Regulation:
Elimination of Greenwashing (unsubstantiated or misleading claims about sustainability characteristics and benefits of an investment product) and an increase of market awareness on sustainability matters;
Regulatory Neutrality: the rules introduce a disclosure toolbox to be applied in the same manner by different financial market operators.
Level playing Field: the regulation covers the following financial services sectors: (i) investment funds; (ii) insurance based investment products (life insurance products with investment components available as individual retail life policies as well as group life policies); (iii) private and occupational pensions, (iv) individual portfolio management; and (v) both insurance and investment advice.
Most large and well - established investors but also quiet a few smaller ones (asset managers, asset owners, private equity funds) selected the path to comply with EU SFDR Regulation. More of them are expected to follow in the next period and in the next years. That means more and more investors will integrate ESG metrics into their investment policy and strategy and more and more will require ESG Data & ESG Metrics from the corporates, in which they invest.
Six main market trends in ESG in the coming years:
ESG will become a standard mainstream compliance topic due to EU NFR Directive, EU Taxonomy Regulation, SFDR EU Regulation, which become a Benchmark for other regions and countries too.
Greater Demand for ESG Metrics and for ESG Products (ESG Funds, Sustainability Linked Loans, Green Bonds etc.). It is estimated that ESG Market, both in terms of assets under management as well as number of ESG market players and ESG funds, will continue to grow further in the next years.
From exclusion to greater ESG Integration. Investors are moving towards adoption of ESG across their entire portfolio.
Mor Active Ownership Approach by Investors . Asset managers plan on working more closely with other shareholder and with corporate leaders, to accelerate action and improve from ESG perspective their companies in which they invest.
More Sophisticated & ESG relevant Reporting by corporates due to the fact that ESG becomes compliance driven and due to higher demand of ESG metrics by investors.
More divestments in specific sectors with negative ESG footprint based on the exclusion investment strategy such as in tobacco, coal, fossil fuels, alcohol, gamboling etc.
Based on all above but also based on the gradual change of the market approach of investors and corporates towards ESG, we can conclude that ESG is not only turning from a niche to mainstream and from a volunteer related to a compliance driven topic, but it becomes even an imperative and a top priority for investors, corporates and states and will be one of the main topics in finance, banking, investing and public policy in the next years and decades.
CAPITALS Circle Group (CCG) GmbH (https://www.capitalscirclegroup.com/) is organising the 6th Sustainable Finance & ESG Invest Forum 2022 (26.1, 17.00 – 20.30 CET in hybrid format -in person at CCG Premises in Berlin & digital via zoom-Zoom link is shared after online registration). Communication Partners are among others Altii.de, Absolut Research, Club GLOBALS & more. For more information & forum registration please visit and register here online: http://capitalscirclegroup.com/events/. CCG acquired recently the clients, projects and products portfolio of Global Sustain GmbH including the ESG Invest & Sustainable Finance Forum concept, which will continue and improve.
About CAPITALS Circle Group (CCG) GmbH
CAPITALS Circle Group (https://www.capitalscirclegroup.com/) is your Bespoke Strategy, ESG & Communication Advisory & Market Intelligence Provider. CCG Advisory is a Berlin-based but internationally active (GER, GR, BE, UK) market and metrics driven “Boutique” Advisory applying in all projects metrics & tools, offering also trainings, workshops. It focuses on int. Corporate & Growth Strategy (including market intelligence, market entry), Sustainable Finance & ESG Services (ESG Strategy, ESG Modelling, ESG Research, ESG Compliance ESG Tools, ESG Training), special PR/IR, Governance, Risk & Compliance.
Yannis Salavopoulos, MBA, MSc, Managing Director, CAPITALS Circle Group (CCG) GmbH & University Lecturer (Berlin)