Monitoring Capital Flows To Sustainable Investments

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In light of the climate and environmental targets set by the European Union (EU), particularly that of reducing greenhouse gas emissions by 55% by 2030...
European Union Strategy
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European Commission publishes progress report on monitoring capital flows to sustainable investment.

In light of the climate and environmental targets set by the European Union (EU), particularly that of reducing greenhouse gas emissions by 55% by 2030, the EU has committed to scale up investments in sustainable activities by 2030 by at least two-thirds, relative to average levels mobilised during the last decade.

From establishing a regulatory framework to monitoring capital flows

Against this backdrop, the EU has, over several years, established a sustainable finance regulatory framework with a view to facilitating the flow of capital into sustainable investments. While the introduction of a sustainable finance regulatory framework has been a significant step forward in support of the objectives of the European Green Deal, in view of the critical targets at hand, it is imperative to take stock of the extent to which capital flows are indeed being redirected towards sustainable investments. To this end, on 4 April 2024, the EU Platform on Sustainable Finance published a Progress Report on monitoring capital flows to sustainable investments (the "Progress Report").

The proposed methodology

The Progress Report highlights that, as a first step, a methodological framework is needed in order to monitor the flow of private capital in sustainable investments and fill the Green Deal investment gap. The methodology proposed rests, primarily, on measuring overall capital flows. Two types of capital flows are proposed to be assessed, namely:

  • capital expenditures in real economy entities, which will shed light on progress towards filling the investment gap. This methodology entails an analysis of data derived from EU-based entities reporting under the Corporate Sustainability Reporting Directive (CSRD) (excluding public expenditure). In this regard, default data sources would encompass regulatory definitions and disclosures, complemented by market standards.
  • financial sector flows, with a focus on loans, bonds, equity and investment funds. Instruments claiming certain sustainability features, such as green bonds or funds disclosing their sustainable investments under the Sustainable Finance Disclosure Regulation (SFDR), will be measured. Additionally, general purpose financing will be measured based on activities of the underlying entity, and loans will be measured by analysing data derived from banks.

Next steps

While it is acknowledged that it may take years to ascertain the full impact of the sustainable finance regulatory framework, now is the time to introduce a monitoring framework, take stock of ongoing capital flows, and assess overall progress.

During the next phase, the EU Platform on Sustainable Finance will test the methodology by putting it into practice. The results will be included in a final report, which report will comprise methodological refinements (expected as regulatory requirements transform into increased data availability and enhanced quality), an analysis of preliminary data, and a proposal for implementing the periodical monitoring.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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