The number of those increasingly interested in applying a sustainable way of living is rapidly growing. And this is not only among young students following Fridays for Future, but also among business leaders. With this perspective we might read the news about Yvon Chouinard giving out his family stake in Patagonia to contribute to the fight to Climate Change with financial resources in a structured way. The European Union has embraced this perspective long ago, establishing targets and goals to be achieved in time. These targets and goals pose challenges, because, as we get better connected by technology, they need a new model of responsible and balanced growth. The European Commission (EC) estimates that in the climate and energy areas an annual investment of EUR 240 billion is needed to meet the European Union’s (EU's) climate and energy targets by 2030. The financial system can contribute to addressing these needs.

In the last two years, the biggest change in the sustainability narrative has been the entry of banks and large financial institutions which have made important commitments towards financing the transition to a clean, green economy. Of the world’s largest 50 banks, 25 have made public sustainable-finance commitments totaling more than USD 2.5 trillion. For instance, Goldman Sachs plans to spend USD 750 billion over the next decade, financing and advising companies focused on climate transition and inclusive growth. Banks have also signed up to the new UN-backed Principles for Responsible Banking and a host of other initiatives such as Science Based Targets or RE 100 which commits to source 100 per cent of energy from renewable sources.

Climate finance provides funds for addressing climate change adaptation and mitigation. On the financing side, are green bonds that are tied to sustainable actions by companies. While green bonds focus on decarbonisation on land, there is a strong need to focus on oceans as well. Here blue bonds come into play. Blue bonds are an innovative ocean-financing instrument whereby funds raised are earmarked exclusively for projects deemed ocean-friendly. Blue bonds can be used to promote blue carbon, protect shorelines, promote ocean energy and offshore wind power, sustainable fishing, sustainable shipping, support medicinal products that come from the ocean, and reduce harmful effects of oil and gas platforms.

Then there are sustainability-linked bonds that pay interest based on performance achieved and transition bonds help companies move from ‘brown’ to ‘green’. Social impact bonds are raised for social causes and like sustainability-linked bonds, are a pay-for-performance security. Green bonds seem to be the instrument of choice of the fashion industry to fund the sustainability transition. Prada SpA raised EUR 50 million and EUR 75 million sustainability-linked loan in 2020. Similarly, Chanel has raised USD 700 million, Burberry has raised USD 387 million and H&M has raised USD 500 million. India has also become the second largest green bond market after China and has joined the European Commission-led International Platform on Sustainable Finance (IPSF).

In March 2018, the EC put forward an action plan on financing sustainable growth. The action plan for the establishment of an EU classification system for sustainable investments, the ‘EU Taxonomy’ was initiated in May 2018. The Taxonomy Regulation was adopted by the EC on 18th June 2020. These EU-wide standards are likely to form the basis for economic and regulatory measures that will eventually create labels that will enable capital markets identify investment opportunities.

According to the Taxonomy Regulation, three types of economic activity can be classified as sustainable: activities that directly contribute to the defined sustainability goals, enabling activities that facilitate the achievement of such goals by providing technologies or services and transitional activities that support the transition to a CO2-neutral economy as long as technological alternatives are not available. The Taxonomy Regulation applied from 1st January 2022 for the objectives of climate change mitigation and climate change adaptation and for the other environmental objectives from 1st January 2023 onwards.

The taxonomy is a pivotal element of the European Sustainable Finance Strategy as it affects the disclosure regulation of both financial institutions and corporates as well as the Green Bond Standard.

1 Sustainable finance’s biggest problems, by the people who know best, Helen Avery, 3 December 2019,
   https://www.euromoney.com/article/b1j97rjr74vd00/sustainable-finances-biggest-problems-by-the-people-who-know-best

2 Principles for Responsible Banking’, https://www.unepfi.org/banking/bankingprinciples/

3 https://sciencebasedtargets.org/financial-institutions/

4 http://there100.org/