Sustainable Investing
Sustainable Finance Action Plan
The Sustainable Finance Action Plan (SFAP) is a major policy objective by the European Union which aims to promote sustainable investment across the 27-nation bloc. Parts of it became effective from March 2021, with a longer timeline for the more complex new laws.
It was first laid out by the European Commission in March 2018 in response to the landmark signing of the Paris Agreement in December 2015, and to the United Nations 2030 Agenda for Sustainable Development earlier in 2015, which created the Sustainable Development Goals. It is also aligned with the goals of the European Green Deal, which aims to see the EU carbon neutral by 2050.
The plan is part of a wider Sustainable Finance Framework which is backed by a broad set of new and enhanced regulations. These include a new Sustainable Finance Disclosure Regulation, which aims to better classify the sustainability credentials of investment funds, and a new EU Taxonomy, which aims to define what economic activities are ‘green’ for the first time. The EU also plans to enhance the sustainability requirements of existing rules such as Mifid for financial disclosures and UCITs for fund registrations.
The SFAP has three main objectives:
To reorient capital flows towards sustainable investment and away from sectors contributing to global warming such as fossil fuels
To manage financial risks stemming from climate change, resource depletion, and environmental degradation
To foster greater transparency and long-termism in financial and economic activity in order to achieve sustainable and inclusive growth.
The scope of the regulation is very broad, and it applies to asset managers, pension funds, EU banks and insurers, among others. For sustainable investment, the plan aims to develop sustainability benchmarks against which investment strategies can be judged alongside the mainstream indices. It wants to better integrate sustainability into ratings and market research, and work towards clarifying asset managers' and institutional investors' duties regarding sustainability.