Sustainable Investment Regulation in the EU and UK
Diving deeper into emerging regulatory changes for impact investment
The headline focus for day three at COP26 was “mobilising public and private finance flows at scale for mitigation and adaptation.”
Eka is an impact-driven venture fund, supporting founders creating positive system change in the areas of sustainability, health equality and inclusivity. One of the underlying objectives of the fund is to mobilise private finance to help address climate change. Hence, day three’s COP26 focus area was one that is particularly important to us.
Mark Carney, former Governor of the Bank of England, has called the net zero challenge as “the greatest commercial opportunity” of our time. He is leading the coalition of international financial institutions, known as the Glasgow Financial Alliance for Net Zero (Gfanz), which will help direct $130 trillion of private capital towards meaningful decarbonisation activities.
While this seismic shift in private finance towards net zero is undoubtedly positive, it is critical that the expected impact of these investments is measured, reported and verified so that capital is effectively mobilised behind sustainability. Recent regulatory changes in the EU mark significant progress in bringing such transparency to the market by creating a new legal definition for sustainable investment. Although this does not currently exist in the UK, it is a focus area for policy-makers.
The EU has been working hard over the last couple of years to develop new regulation and policies that lay the plumbing for efficient capital flows towards activities that have a positive environmental or social contribution. In March 2021, the Level 1 Sustainable Finance Disclosures Regulation (SFDR) was enacted. This requires asset managers to publish statements on their websites disclosing which of their products fall into three distinct categories:
Article 6 funds — do not integrate any kind of sustainability into the investment process. They must be clearly labelled as non-sustainable
Article 8 funds — promote environmental or social characteristics
Article 9 funds — specifically have sustainable investment as their objective
It’s important to note that a sustainable investment can be an activity that contributes to a social OR an environmental objective. It’s worth downloading the EU Taxonomy Compass to understand how policy-makers are developing the structure for assessing investments that relate to environmental objectives. Activities that contribute to social objectives have to be measured and demonstrated with the same stringency as for environmental objectives but the EU has yet to propose a similar taxonomy compass.
The EU is also changing the terminology to move away from the use of the word impact due to its association with adverse products. The terminology going forward is around sustainable investments or investments which have substantial contribution.
In July 2019, the UK set out its commitment to transform the financial system and to at least match the ambition of the three key objectives included in the EU’s Sustainable Finance Action Plan (see more). In October 2021, the UK government produced a roadmap outlining how the next steps to be taken are to implement Sustainability Disclosure Requirements (SDR) across the economy. There is no current timeline illustrated for when these will come into force but it is likely to be a focus following COP26.
It’s clear that we still have a long way to go in mobilising private and public finance towards sustainable activities but it’s good to see that it’s a focus area not just at COP26 today but for regulators and policy-makers in the EU and UK.
We’d like to extend our thanks to Sergio and all the team at Planet First Partners who have been invaluable in helping us stay on top of the latest changes to regulation and policy in this space.
If you are a founder working on a company that has a positive social or environmental contribution, please do get in touch via our website.
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