Sustainable finance is an increasingly important concept in today’s world. From renewable energy and sustainable agriculture to ethical employer practices and community welfare projects, sustainable finance encompasses a wide range of initiatives aimed not only at ensuring financial returns, but also creating a better world for future generations. We are already experiencing the negative consequences of climate change and everybody will need to change their approach to the environment and the community they live in.
Sustainable finance is not just about “green” financing. It is a process of considering and taking into account environmental, social and governance (ESG) factors when making investment decisions. It involves redirecting financial flows towards the development of low-carbon and climate-resilient economies, as well as towards the protection of human rights, children’s rights, and corporate governance culture.
With a view of a successful transition to a more sustainable and environmentally friendly economy, the European Union (EU) adopted the European Green Deal in 2019, which aims to achieve climate neutrality by 2050. To this end, the Deal stimulates public and private investments required for the transition to a climate-neutral, green, competitive and inclusive economy, whose implementation requires significant engagement of all sectors of the economy, especially the financial sector.
Indeed, the financial sector plays a crucial role in sustainable financing because it is responsible for allocating capital to initiatives and financial products aligned with the EU and national sustainability plans. This involves investing money in ways that support sustainable economic growth, protect the environment and promote social welfare while generating financial returns for investors.
In the Republic of Croatia, special attention has been given to the question of sustainable development in the Government’s National Recovery and Resilience Plan 2021 – 2026, which points to the need for creating a sustainable and resilient economy with a focus on green and digital transformation.
Sustainable finance plays a crucial role in accomplishing the policy objectives within the international commitments of the European Union concerning climate and sustainability goals. It is important because it recognises that financial decisions have consequences in the real world and that investors have a responsibility to take these consequences into account when adopting investment decisions. By investing in sustainable projects and companies, investors may contribute to positive changes and a more sustainable and equitable future.
The EU is a leader in terms of regulation and standardisation of the processes and factors related to sustainability and ESG, but companies listed on stock exchanges worldwide are also shifting their focus from short-term profit maximisation to long-term environmental, social and governance goals. Management is becoming increasingly aware of the importance of ESG care, which can influence the financial health of a company as well as its reputation in the market.
To implement such a plan, a legislative framework has been adopted for the operation of participants in the financial sector in order to redirect the financial flows into sustainable economic activities and transparently present business activities related to sustainable financing. The obligations for disclosing data related to sustainability are primarily stipulated in Regulation (EU) 2019/2088 of the European Parliament and the Council (SFDR) and the Taxonomy Regulation and its amendments.
The SFDR stipulates an obligation for sustainability-related information disclosures for all the participants in financial markets and financial advisors, regulating the process for including ESG factors in the analyses prepared when deciding on investment in specific companies. The Regulation also indirectly applies to issuers because only those issuers who disclose relevant ESG information will be considered for potential investments.
Article 8 of the Taxonomy Regulation stipulates an obligation of issuers to disclose the indicators of the proportion of their turnover, the proportion of their capital expenditure and the proportion of their operating expenditure related to environmentally sustainable economic activities concerning six environmental goals. The said Article has been in effect since 1 January 2022 in relation to two environmental goals: climate change mitigation and climate change adaptation. In June 2023, a delegated act was adopted as a supplement to the Taxonomy Regulation, stating the criteria for the technical verification of economic activities concerning the remaining four goals. Furthermore, amendments to the Taxonomy Regulation further elaborate the KPIs and all necessary disclosures in this area.
A new Corporate Sustainability Reporting Directive (CSRD) entered into force in January 2023. The Directive supersedes the existing Non-Financial Reporting Directive (NFRD) and Member States are obliged to transpose it to their national legislations by 6 July 2024. It imposes obligations for publishing ESG-relevant information for all large companies and all issuers. The application for the first obligors starts in 2024, and publication of the first reports under CSRD starts in 2025.
The European Financial Reporting Advisory Group (EFRAG) is obliged to prepare the European Sustainability Reporting Standards (ESRS).
So far, Hanfa has had an active role in supporting issuers and the financial services sector in adapting to changes brought about by the new ESG regulatory framework. Even before the application of the EU regulation, in March 2021, Hanfa published the Guidelines on the preparation and disclosure of ESG-relevant issuer information in order to enable uniform actions and reporting, aiming to make the disclosed information comparable, reliable and comprehensible.
The transposition of the CSRD into the amendments to the Accounting Act and Audit Act is also expected soon, and Hanfa experts are participating in its preparation. However, one of the major challenges faced by regulators in all countries is the prevention of greenwashing. Greenwashing is a practice in which statements, declarations, actions or communications related to sustainability do not reflect the basic sustainability profile of the entity, the financial product or financial services clearly and honestly. This practice can mislead consumers, investors or other participants in the market.
Within its regular activities (prospectus approval, investment fund licensing, monitoring fund operations), Hanfa is already able to monitor whether such deceptions are used in practice.
EIOPA and national competent authorities have started to integrate greenwashing issues in their supervisory activities and they will certainly, for the purpose of additional precision, propose further improvements of the rules, which is expected in their Final Report in May 2024.