Responsible Investor

Sustainable investments and the fight against “greenwashing” in Europe

Changing existing cultures, processes and technology will be key to meet climate and energy targets by 2030

The Covid-19 pandemic, as well as posing a huge challenge to health care systems around the world, has also increased the need in many countries to redirect capital flows towards sustainable investments in order to make our economies, businesses and societies more resilient to climate and environmental emergencies and risks. This ambitious goal is also in line with the aim of reaching climate and energy targets set by the European Green Deal, which include investments in sustainable projects and activities in Europe as a fundamental pillar. The new implementing rules on the EU sustainable finance taxonomy, published in June 2020 by the European Parliament, represent a major breakthrough, as this is the first “green list” of economic activities aimed at encouraging private investments in a green economy. The aim is to shed light on which companies are truly sustainable and to prevent “greenwashing” by providing investors with a clear operational guide on what is, and what is not, truly “green”.

The objectives of the new EU regulations on sustainable investments in Europe are: climate change mitigation and adaptation; the sustainable use and protection of water and marine resources; the transition to a circular economy, including waste prevention and increasing the uptake of secondary raw materials; pollution prevention and control; and the protection and restoration of biodiversity and ecosystems.

Establishing clear European “green” criteria for investors is key to enabling entrepreneurs to raise more public and private funds, and allowing the EU to become carbon neutral by 2050, as set out in the European Green Deal. The Commission estimates that Europe needs around 260 billion euros per year in additional investments to meet its climate and energy targets by 2030. The new taxonomy – which was scheduled to come into force on the 1st of January 2021, but has been delayed due to vetoes by some member states – stipulates that all financial products claiming to be sustainable will have to prove their sustainability according to strict and ambitious criteria. The legislation also gives the Commission a clear mandate to start defining environmentally harmful activities, while activities that are incompatible with climate neutrality but which are considered necessary for the transition to a climate-neutral economy will be labelled as transition or enabling activities.

Sustainable investments, also known as socially responsible investments, integrate environmental, social and governance (ESG) factors into investment decisions. Over recent years, many European companies have invested sustainably in various sectors, from renewable energy and climate change to health, security and community development. According to the Global Sustainable Investment Alliance’s latest biannual report, which is three years old, ESG investments grew to over 30 trillion dollars in 2018, and this number is set to grow further as consumer tastes change and investors demand increased transparency. Europe once again confirms its position as leader in green investments, holding the largest share of this investment at 14 trillion dollars, ahead of the United States, which stands at 12 trillion dollars.

Driving this staggering market growth are evolving macroeconomic trends. With an estimated additional 2 billion people by 2050, global demand for food, water and energy will determine the need for innovative improvements to infrastructures to meet demand for the resources linked to a growing population. Clean water and sanitation services, innovations in energy generation and distribution, improved healthcare and more efficient transportation all offer opportunities for sustainable investment growth in Europe. In light of this, it is clear that, while sustainable investments in Europe can still be used to create competitive advantages, implementing socially responsible practices is rapidly becoming a requirement for doing business in the green investment sector: embracing this industry trend means changing existing cultures, processes, technology and training programmes to align them with sustainable investments in Europe. In the end, pushing corporate culture to accept sustainable investments as the norm, rather than a preference, is an extremely beneficial incentive for companies to challenge the “status quo”.