Sustainable Finance

Your expert for questions

Christoph Schellhas
Financial Services Sustainability Lead, PwC Germany
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From meeting regulatory requirements to gaining a competitive edge through sustainability

The issue of sustainability affects every business at the moment, especially in the financial market. Regulatory requirements are becoming increasingly strict, and pressure from politicians, customers, and competitors is rising. But sustainability isn’t just a commitment to the environment, it also makes financial sense too. Integrating ESG factors into strategy, governance, products, risk management, reporting, and controlling is the only way to build a forward-looking, resilient business.

In its capacity as a lender and investor, the global financial industry has a huge role to play in making the economy more sustainable. The European Union has recognized this and has introduced far-reaching regulations as part of its Sustainable Finance Action Plan SFAP. It aims to reorient capital flows toward a more sustainable economy through greater transparency and standardization, as well as improved risk management. Regulations include the EU Taxonomy Directive, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD).

Key regulations at a glance

Taxonomy Regulation

With its Taxonomy Regulation, the European Commission has introduced a standardized EU classification system for a more sustainable economy. The aim of the legislation is to create more transparency for investors. There are three criteria investments have to meet in order to qualify as sustainable: They must make a substantial contribution to one of the EU’s six environmental objectives, they must not cause any significant harm to these objectives, and they must meet minimum social standards.

SFDR and MiFID II

The Sustainable Finance Disclosure Regulation (SFDR) is geared toward creating more transparency regarding the ESG criteria of financial products, promoting sustainable investment, and preventing greenwashing. The addition of sustainability aspects to the Markets in Financial Instruments Directive II (MiFID II) requires financial advisers to ask customers about their sustainability preferences.

Corporate Sustainability Reporting Directive (CSRD)

Under this new legislation, some 50,000 companies from all over Europe will have to publish information on sustainability and have their disclosures audited externally. The European Financial Reporting Advisory Group (EFRAG) has developed European Sustainability Reporting Standards (ESRS) for this very process. The standards are extremely detailed and apply the principle of double materiality, where both sustainability-related impacts on the company and the impacts of a company on the society and the environment are considered material.

Sustainable finance in numbers

The time to act is now

In March 2023, the Intergovernmental Panel on Climate Change (IPCC) published its latest report on climate change, in which it recognized the interdependence of climate, ecosystems, biodiversity, and human societies. Climate change caused by human activity is already leading to extreme weather with adverse effects throughout the world. Our planet may have heated up by 1.5°C by between 2030 and 2035. We are running out of time, which is why this is the decade to take action. 

The EU is committed to achieving net-zero emissions of greenhouse gases by 2050, which includes a dramatic reduction of harmful gases in our atmosphere and the offsetting of all other unavoidable emissions.

In order to reach its sustainability goals, the European Commission has pledged one trillion euros in sustainable investment as part of the European Green Deal. Between 2021 and 2030, the EU needs to invest 350 billion euros more per year than in the previous decade. Investment should come from the public sector as well as the financial industry, which is why sustainable finance is so important. Sustainable finance has already gained a foothold in the market, with 60 % of major investors in Germany already giving preference to sustainability impact over returns when making decisions on investments. Sentiment among stakeholders has also changed accordingly, with the number of environmental lawsuits rising and 58 % of cases being ruled in favor of measures to protect the environment. European banks still have a lot of ground to make up, with the results of the 2022 ECB climate stress test showing that more than half of the income generated by institutions monitored by the ECB originates from high-emission industries. 

Managing ESG risks is also important to the insurance industry, as climate change is already noticeably and significantly increasing the frequency of extreme weather events and the damage they cause. Mangrove deforestation, for example, increases the global risk of flood damage by more than 16 %, equivalent to 82 billion U.S. dollars, every year.