The European Commission's action plan
In March 2018, the European Commission published an action plan for financing sustainable growth. This was based on the 2016 Paris Climate Agreement and the United Nations 2030 Agenda for Sustainable Development.
The core element of the action plan is the concept of sustainable finance. This generally refers to the consideration of environmental and social aspects ("ESG-factors"), in decision-making and investment consulting, which should lead to more investments in longer-term and sustainable activities. Topics such as climate change, equitable access to opportunities and distribution of resources, and the battle against any forms of corruption make sustainability more urgent than ever.
The European Commission's action plan specified the following three objectives:
(1) Redirect capital flows to sustainable investments to achieve sustainable and integrative growth,
(2) manage financial risks arising from climate change, resource scarcity, environmental degradation, and social problems and
(3) promote transparency and long-termism in financial and economic activity.
However, sustainability is not just a purely environmental topic, as is often assumed, but also encompasses a company's dealings with its employees or with the issue of human rights, as well as the principles of good corporate governance.
ESG therefore covers three aspects of sustainability:
- E is for "Environment", the environmental protection
S is for "Social", social justice
G is for "Governance", conscientious corporate governance
The "fourth" column of investment
Under the existing MiFID II framework, firms providing investment advice and portfolio management must obtain the necessary information about their clients' investment knowledge and experience, risk tolerance, investment objectives and ability to bear losses. In addition to this information, which generally relates to financial objectives, relevant sustainability preferences must also be requested with immediate effect.
The triangle of investment - return, security, and liquidity - is supplemented by the aspect of sustainability. While the first three components of investment are competing objectives, this is not necessarily true for the sustainability component. The use of environmental, social and governance (ESG) criteria does not have to mean sacrificing returns. Most studies conclude that investments that consider sustainability criteria can perform at least as well as conventional investments.