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Environmental, Social & Governance (ESG)

When financial market participants refer to sustainable finance, it is the focus on processes that will be affected or impact Environmental, Social and Governance (ESG) considerations. Discussions in this arena are key to determining appropriate capital usage in adherence to the new global regulatory landscape.

Although a global topic, from an EMEA perspective this centres primarily on policy objectives of the European Union (EU), taking into account the European Green deal as well as the EU’s international commitments to fighting climate change. The EU has been a world leader in transitioning to a low-carbon and sustainable economy, with its unrivalled efforts to create a financial system to support its goals.

Key events include the international agreement on the adoption of UN Sustainable Development Goals by 2030, and the Paris Agreement, which was the first global initiative to combat climate related issues. In 2019, the European Commission released the EU Green Deal, pledging Europe to become the first continent to be carbon neutral by 2050, and presenting an investment plan in 2020 to help focus public and private investment to this cause. In 2020, the UK also outlined proposals of a Ten Point Plan towards a green industrial revolution.

In April 2020, the Commission launched a consultation on the Renewed Sustainable Finance Action Plan, building on the 2018 Action Plan, and focussing on 3 core areas:

  • Strengthening the foundations for sustainable investment by creating an enabling framework, with appropriate tools and structures.
  • Increasing opportunities to have a positive impact on sustainability for citizens, financial institutions and corporates.
  • Integrating climate and environmental risks into the financial system, whilst ensuring social risks are duly taken into account and reducing the exposure to climate and environmental risks.

Publication of the Renewed Sustainable Finance Strategy is expected in Q1 2021.

The ISLA Council for Sustainable Finance (ICSF) launched in January 2020, led primarily by beneficial owners, developed the Principles for Sustainable Securities Lending (PSSL) and helped advocate the compatibility of securities lending to ESG Principles. In December 2020, as this work concluded, ISLA created an ESG Steering  working group with representation from both buy-side and sell-side members. Working with relevant industry stakeholders as well as the regulatory community, the group looks to develop an ‘ESG Policy Framework’ around four key pillars; Advocacy & Consultations, Best Practice, Regulation and Thought Leadership.

Please note, ISLA has a separate Corporate Social Responsibility section, which focuses specifically on its own CSR strategy amongst other things.

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