Regulatory landscape and impact assessment
The EU Action Plan on Sustainable Finance is leading to several new EU regulations.
Sustainable finance
What is sustainable finance? Why is it so important for financial institutions?
The continuously changing EU regulatory landscape is creating a climate of uncertainty. Binding regulations on sustainable finance are fast approaching and the transition poses significant challenges to financial institutions. Is your organisation prepared?
Sustainable finance is the mobilisation of finance to integrate environmental, social and governance (ESG) criteria into business or investment decisions, leading to sustainable growth and the transition to a climate-neutral economy.
On one hand, society is calling upon the financial services sector to contribute to a sustainable future; and on the other hand, regulators and supervisory authorities are working towards requirements and standards with which financial institutions will have to comply.
Who is affected? All financial market players
Why is the transition towards a more sustainable economy so important to financial institutions?
1. It’s a regulatory matter
For the EU to reach its international environmental commitments and targets, the EU regulatory landscape is undergoing considerable changes. Binding regulations on sustainable finance (will) pose very important challenges to the overall structure of financial institutions. This makes it essential for organisations to prepare as early as possible.
2. It’s a strategic matter
By developing new products/services, new client segments, and new business models, financial institutions can gain a competitive advantage compared to their peers and increase the profitability of existing business segments (via consideration of ESG factors) while simultaneously creating new profit streams.
3. It’s a risk matter
Although many aspects are still unclear, climate-related and environmental risks will materialise in one way or another. For financial institutions, these risks translate into:
- Physical risks - The financial impact of a changing climate, including more frequent extreme weather events and gradual changes in climate, as well as environmental degradation like air, water and land pollution, water stress, biodiversity loss and deforestation.
- Transition risks - An institution’s financial loss that can result, directly or indirectly, from the process of adjusting towards a lower-carbon and more environmentally sustainable economy.
What is the impact of sustainability on financial institutions?
The implications and potential of sustainable finance are many, and they affect all organisational levels of financial institutions.
Giving it a structure, the journey towards sustainability will have to focus on governance, risk management and disclosure around a newly integrated business model and strategy based on an initial regulatory impact assessment, as illustrated below.
A newly integrated strategy and business model with 3 areas of focus
Top-down integrated approach
The five essential elements to consider in your transition to sustainable finance
Strategy and business model
Identifying the best possible options for strategic positioning in the market.
Governance and risk appetite
For financial institutions, integrating sustainability means revising aspects of the current governance model.
Risk management & stress testing
Integrate climate-related and environmental risks within your overall business model and strategy.
Disclosure
It’s essential to start preparing now to meet the demand for transparency and accountability.
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The transition to a sustainable economy is accelerating
Organisations need to prepare now. It means better business for a better world.
To find out more about sustainable finance, the likely impact on your organisation and how PwC can help, please get in touch.
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