Sustainable Finance: Yesterday, Today, Tomorrow

Thursday, 4 June 2020

For some years now, there has been no getting around the catchwords "green" and "sustainable" when dealing with investment opportunities on the capital market. The demand shows: The trend towards all things sustainabiliy does not seem to be just short-lived. The fact that sustainable products proved to be relatively crisis-proof during the challenging Covid period should help to ensure that demand will continue to rise in the future.

Sustainable Finance has therefore already made a name for itself on the capital market and is very much in vogue. However, it has a lot in common with many other trend phenomena: Nobody knows exactly what the fuss is all about. Especially in the world of funds and insurance investments there are countless products that all describe themselves as sustainable. However, there is currently a lack of clear rules as to who is allowed to label their product with this label and under what conditions.

This is now to change with a series of European legislative projects:

- With the forthcoming Taxonomy Regulation (currently only available as a draft), the European legislator wants to bring clarity to the mixture of different definitions and make it easier for investors to distinguish truly green products from those that are only "green washed".

- In contrast to the Taxonomy Regulation, the Disclosure Regulation has already been adopted but has not yet entered into force. Under this regulation, all financial market participants (e.g. banks and insurance companies) must in future disclose material sustainability information about themselves and their products, e.g. why a product should be sustainable in concrete terms or how the company deals with sustainability risks.

- In the area of investment advice, new delegate regulations are to determine how (potential) investors' wishes for sustainable products are to be dealt with in the investment and advisory process.

The problem here is that the question of understanding sustainability is often strongly influenced by ideological, political and economic viewpoints and interests. For example, hydropower is considered sustainable, but when it comes to building a new power plant, conservationists are often unenthusiastic. Many will consider a bond issue to finance the development of electric cars "green", but others point to the problems associated with the production and disposal of batteries.

The Austrian Financial Market Authority is also dealing with this issue. Although the authority has otherwise been rather reticent in recent years, it has published a guide on the subject of sustainability risks (currently still undergoing the consultation procedure). Since this is a classic cross-sectional topic, the target group is all supervised entities. The guide provides a very clear and practical overview with numerous examples of how supervised institutions should deal with sustainability risks from the point of view of the authority. However, as the Chamber of Commerce already noted in its statement on the guide, the authority deals exclusively with sustainability risks - and does not say a single word about the opportunities for sustainability. This should indeed be added, the one-sided concentration on the difficulties is certainly not good for this topic in particular.

In summary, the issue of sustainability will be subject to a significant "wave of legislation" in the coming months and years. Many of the documents - from the large, EU-wide Taxonomy Regulation to the Austrian FMA Guidelines - are currently still available in draft form, so the final versions remain to be seen. Based on the drafts, however, one sometimes gets the impression that the topic, which, as noted above, could do with a little more clarity, is now being tackled in a rather technical manner. The challenge at European and Austrian level will therefore be to strike a balance between transparency and over-regulation.

In any case, one thing is already clear: The inherent contradictions of the concept of sustainability will also make it difficult for the new rules to get a full grip on them. This was already evident in the discussions on the Taxonomy Regulation, where it was noted early on from several sides that nuclear energy, for example, would also meet the requirements of the environmental objectives set out in the Regulation. A result with which perhaps not everyone will be happy.