Sustainability in the financial market is becoming increasingly important. From a niche topic, the subject is developing into generally applicable and binding principles. The following text is therefore intended to provide a brief overview.
Sustainability in the financial market
Efforts to promote sustainability in financial investments (sustainable finance) are becoming increasingly important in the European financial market. The European Union (EU) is taking on the role of a pioneer here, conducting an intensive dialogue with the various stakeholders and advocating for an optimal regulatory framework (level playing field).
On historical classification: The topic of sustainability was first addressed in the course of the UN World Environment Conference in Stockholm in 1972. Other important cornerstones were the UN Environment Summit in Rio de Janeiro in 1992 and the third UN Climate Change Conference in Kyoto in 1997. The Paris Agreement of 2015 should also be highlighted. The contracting parties committed themselves to the common goal of reducing global warming compared to pre-industrial times and limiting greenhouse gas emissions as part of a binding agreement. The EU is committed to these climate targets and recognises the essentiality of a sustainable and more resource-efficient economy. To this end, the EU published the Sustainable Growth Financing Action Plan in March 2018. In December 2019, climate neutrality 2050 was also adopted at European level. Accordingly, the EU published the so-called European Green Deal with comprehensive climate protection targets to implement the political commitment in the service of the environment
Numerous studies show that sustainable investments (sustainable finance) yield at least as good a return as conventional financial investments. Sustainability therefore does not offer additional costs, but rather additional opportunities. For example, in the first wave of the Corona pandemic, conventional equity funds suffered significantly higher price losses than comparative products that took into account environmental (E), social (S) and good corporate governance (G) aspects. But what exactly is meant by sustainable investments and how can they be classified between traditional investments and philanthropy? The following graphic is intended to show the various stages from sustainability to impact orientation:
The achievement of these goals and targets requires the management and limitation of sustainability risks in the financial market, as this is where the European legislator expects to have the greatest leverage effect. However, for various reasons, the practical implementation is usually carried out only hesitantly. To promote the transformation, the EU has issued numerous directly applicable regulations that are intended to facilitate comparability and implementability. Currently, it is not only difficult for investors to identify which financial products actually meet the sustainability criteria. Financial market participants throughout the value chain are also dependent on binding and comparable specifications. In the course of increasing demand, so-called greenwashing of financial products has unfortunately increased. Financial products are marketed as sustainable without the issuer being willing or able to meet the sustainability requirements. The result is not only a loss of investor confidence (information asymmetry), but also a loss of reputation for the European financial market as a whole.
The common understanding is to see sustainability as an opportunity for the European financial market. We all benefit from a sustainable financial market. In the meantime, it is widely perceived that sustainable financial investments yield just as good a return as conventional financial investments. Sustainability therefore does not mean additional costs, but rather offers monetary and also non-monetary returns. By considering and promoting sustainable investments, each of us can help to ensure that the climate targets and the Sustainable Development Goals can be achieved. Let’s do it!