The European regulation on sustainable finance comes into force: is there a definition of sustainable investment?

Date: 10th March 2021

To revive the economy, protect the Planet and promote social cohesion we need that finance is inspired by concepts of social justice, inclusion and respect for the environment.

March 10th 2021 marks the entry into force of the first European regulation adopted as part of the ambitious EU Action Plan for Sustainable Finance, essentially the action plan that defines a global strategy to link finance to environmental sustainability and compatible with the principles of equity and solidarity. Europe aims to answer some questions made even more crucial by the need to design a new economic model to lead the Old Continent out of the crisis triggered by the pandemic. How can a sustainable economic-financial activity be recognized? What characteristics must an investment have in order to be defined as truly "green"? And how to defend oneself from those who propose financial instruments in which the sustainable aspect responds exclusively to marketing logic?

Today there is no shared standard. In other words, we still do not know what is meant by "sustainability" in financial investments, which allows each bank or manager to give their own definitions, often rather weak and tailored to their needs. Europe is moving to define a framework of rules: the Sustainable Finance Agenda* - the Finance Action Plan published in March 2018 - on the one hand recognizes the unsustainability of much of the current financial system, and on the other tries to intervene to frame and develop a possible alternative, setting among its objectives the redirection of not only public but also private financial flows towards sustainability. Regulation 2088 of 2019 - which comes into force on March 10, 2021 - tries to give a precise definition of sustainable investment.

Ethical finance and sustainable finance are not the same thing. The new European regulations are of great interest to the international ethical finance networks, which express appreciation for the EU's efforts, but cannot fail to highlight some concerns, starting with the EU Commission's controversial choice to entrust the financial giant BlackRock with the role of advisor for sustainable finance. Ethical finance - as understood and practiced for decades by many financial institutions in Europe and beyond - is in fact something very different from the sustainable finance that Europe is trying to regulate, in particular regarding: profits and community, governance models, and environmental criteria. Let’s focus on the latter one.

Environmental criteria and partial vision

In the EU approach, sustainability is defined almost exclusively by looking at the environmental component. Ethical finance, on the other hand, takes into consideration every environmental, social and governance aspect in the traditional ESG analysis, and also their respective interrelationships. 

Ethical finance starts by defining certain economic sectors that must necessarily be excluded from investment (arms, fossil fuels, pornography, etc.) and then evaluates companies operating in sectors that are not excluded on the basis of an overall view of their impacts. For example, in Europe there are those who consider "sustainable" investments in gas-fired power plants or hydroelectric plants built by building dams that devastate the environment and endanger the communities living in those territories: for ethical finance, however, these investments are unacceptable. Also, many financial products sold as sustainable invest in big tech, which is considered neutral in terms of CO2 emissions and therefore clean. Ethical finance, on the other hand, excludes these investments because Big Tech is not fiscally transparent and is at the center of evaluations of its potential negative impacts.