How should a “sustainable” financial investment be defined? The European Responsible Investment Framework, including the 2019 Sustainable Finance Disclosure Regulation (SFDR) and the 2020 Environmental Taxonomy, draws three fundamental principles:
- “contribute to” (a sustainability goal),
- “do no harm” (to any other sustainability goal), and
- “comply with” (good governance practices).
This European process, clarifying what constitutes sustainable investment, is obviously welcome. Implementing and interpreting the SFDR has not been easy, however. The concerns are twofold: lack of access to data to account for sustainability risks and confusion over definitions of terms, including the definition of sustainable investing.
The current European reporting framework for companies is not fit for purpose. The upcoming implementation of the CSRD Directive, as reviewed by the European Commission in June 2023, falls short of expectations and will not necessarily solve the problem of data. As for the definition of “sustainable investment”, in practice the implementation of principles “contribute to” and “do no harm” is very uneven and fragile to say the least.
This is particularly true for the social chapter, which is clearly under-represented or even neglected. There is no Social Taxonomy equivalent to Environmental Taxonomy. As for sustainability indicators, a brief overview shows the imbalance between the environment on the one hand, and the social and governance on the other.