As the implementation of the CSRD, SFDR, ESRS, and Green Bond Regulation progresses, the financial markets are undergoing inevitable changes. For enterprises, both profit and non-profit, not directly impacted by the CSRD, these changes may not be immediately noticeable. Here's a wake-up call: any enterprise seeking financing from or through professional market parties will start to feel the effects.

This is simply because rules imposed on banks, funds, insurers, pension funds, as well as crowdfunding platforms and licensed financial advisors, aim to make capital flows transparent and ensure they are directed towards sustainable investments. To assess the impact on your own business, it's crucial to understand the background of this legislation and its overall impact on the financial world.

The starting point is the Paris Agreement on climate, signed in 2015 by 195 countries, derived from the UN Sustainable Development Goals. These goals, widely embraced, are expected to significantly improve lives for many people, both now and in the future.

To fulfil the Paris Agreement, the EU developed the Sustainable Finance Action Plan, presented in 2018. This plan emphasizes two urgent measures to achieve the desired goals:

  1. Improving the financial sector's contribution to sustainable and inclusive growth by financing society's long-term needs; and
  2. Strengthening financial stability by incorporating environmental, social, and governance factors (ESG) into investment decision-making.

All subsequent legislation, namely CSRD, SFDR, EU Taxonomy, and the Green Bond Regulation, issued by the EU, translates into three objectives outlined in the Sustainable Finance Action Plan:

  • Reorienting capital flows towards sustainable investments to foster sustainable and inclusive growth;
  • Managing financial risks arising from climate change, resource depletion, environmental degradation, and social issues; and
  • Promoting transparency and long-term thinking in financial and economic activities.

Sustainable Finance Disclosure Regulation (SFDR)

SFDR, aligned with the UN Sustainable Development Goals, aims to enhance information provided to end investors regarding the sustainability impacts of investment policies and decisions by financial market participants. The disclosure requirements under SFDR apply to financial market participants such as banks, investment firms, pension funds, and also to financial advisors with three or more employees providing investment advice or advice on insurance-related investment products. The law applies to these entities regardless of whether they offer sustainable financial products.

Corporate Sustainability Reporting Directive (CSRD)

CSRD mandates phased reporting on sustainability criteria for entities meeting specified criteria (including banks, pension funds, and insurers). Companies not falling within the criteria may indirectly be affected by CSRD, for instance, when producing for an entity subject to CSRD. These entities would request information to meet their obligations.

CSRD covers three areas: Environment, Social, and Governance (ESG). Reporting specifics are detailed in the European Sustainability Reporting Standards (ESRS), covering aspects like CO2 emissions, gender distribution in leadership, personnel policies, or information on managing relationships with suppliers and impacts on the supply chain.

EU Taxonomy for Sustainable Activities:

The EU Taxonomy serves as a classification system indicating whether a fund, investment, or financial product is sustainable or not. It stipulates that they can only bear the label 'sustainable' if they meet three requirements:

1. They must make a substantial contribution to at least one of the six environmental goals:

  • Limitation of climate change (mitigation);
  • Adaptation to climate change and its consequences (adaptation);
  • Sustainable use and protection of water and marine resources;
  • Transition to a circular economy;
  • Prevention and control of pollution; or
  • Protection and restoration of biodiversity and ecosystems.

2. They should not cause significant harm to the other environmental goals.

3. They must comply with the minimum requirements regarding social standards (e.g., human and labor rights).

Green Bond Regulation

This regulation outlines uniform requirements for bond issuers to use the designation 'European Green Bond' or 'EuGB' for their environmentally friendly bonds. These bonds must aim to finance investments in green technologies, energy efficiency, resource efficiency, sustainable transport infrastructure, and research infrastructure. European green bonds will align with the EU Taxonomy for sustainable activities and be globally available to investors.