Sustainable Finance: No Time to Rest on our ESG Journey


ESGs are everywhere we look – and rightly so! In the past decades, the growing reach and impact of businesses at national, regional and international levels has fueled a vigorous debate on the environmental and social responsibilities of private actors (Aerni, 2015).

Already at the World Economic Forum in 1999, Kofi Annan, the UN Secretary-General then, had proposed a “global compact of shared values and principles” to be developed between the United Nations (UN) and the private sector. This led to the adoption of the UN Global Compact, which is the first of its kind in the history of international law- and policy-making (Panizzon, 2017). Currently, the UN Global Compact brings together over 19,000 companies worldwide to implement ten principles under four thematic clusters, namely, human rights, labour, environment and anti-corruption (Global Compact, 2022). The development of the UN Global Compact was shortly followed by (i) the “Protect, Respect and Remedy” Framework, which was presented by the UN Special Representative John Ruggie in 2008, (ii) the UN Guiding Principles on Business and Human Rights, which was developed to implement Ruggie’s Framework and presented in 2011, and (iii) the recently launched project UNGPs10+ aiming to chart the next decade of the Global Compact’s implementation.

The UN General Assembly adopted the Sustainable Development Agenda in 2015, which galvanizes 17 goals (SDGs) to be achieved by States with the critical contributions of non-State actors by 2030. In the same year, the undeniable role of business in addressing climate change was recognised in the first-ever universal, legally binding global climate deal, the Paris Agreement on Climate Change. The private actors are now a part of the collective action to limit global warming to “well below” 2°C and “pursue” efforts to cap warming at 1.5°C. This was made more evident with the adoption of the COP26 Private Finance Agenda, aiming to transition the whole economy to achieve net-zero by 2050 at the latest, and the commitments from nearly 500 global financial services firms to align $130 trillion with the climate goals set out in the Paris Agreement.

What are “ESG” and “Sustainable Finance”?

“ESG” is an umbrella term that refers to the incorporation of environmental, social, and governance considerations into business decisions, including investors’ portfolio decisions. What is meant by environmental considerations is issues such as climate change and carbon emissions, circular economy, pollution prevention, biodiversity, deforestation, energy efficiency, water scarcity and waste management. Social issues include human rights, labour standards, gender and diversity, community relations, employee engagement and data protection and privacy. Governance issues include bribery and corruption, board composition, lobbying, employee relations and executive remuneration.

The inclusion of ESG factors into business decisions is very recent and revolutionary. Traditionally, companies have been asked to disclose financial factors only, including income, cost of goods, and gross profit margin. The ESG factors push for a paradigm change towards “profit with purpose” and lead to the disclosure of traditionally non-financial factors.

One driving force behind the incorporation of ESG issues is the international legal and policy landscape briefly highlighted in the introduction. Another is societal change. For instance, the transfer of wealth from baby boomers to the millennial generation and the increasing proportion of high-net-worth individuals with preferences for allocating wealth more sustainably (Matos, 2020). Another is the increased investment regulation in the aftermath of the global financial crisis of 2008, which is currently moving towards increased regulation in favour of sustainable finance (Park, 2018).

This brings us to what sustainable finance actually means. Although there is no uniform, internationally binding definition, sustainable finance can be understood as the process of taking environmental, social and governance considerations into account when making investment decisions in the financial sector, leading to more long-term investments in sustainable economic activities and projects (European Commission, 2022).

Lived Experiences

ESG and sustainable finance arise from lived experiences. The labour rights abuses of people, including children, working in global supply chains continue to be documented (Human Rights Watch, 2019). Communities continue to face human rights violations and environmental damage caused by businesses, including in the construction, mining, and industrial agricultural sectors (BSR, 2022). Furthermore, the impacts of climate change continue to cause an existential threat to certain communities, especially those living in small island states (Yildiz Noorda, 2022). As a recent study showed, a relatively small number of fossil fuel producers and their investors hold the key to tackling climate change (CDP, 2017).

An essential part of addressing these risks and impacts is by reporting. Picking the right metrics is key to ESG reporting – which in turn makes sustainable finance implementable. When it comes to ESG metrics, creating measurable and comparable standards is an ongoing challenge. Numerous institutions, such as the Sustainability Accounting Standard Board (SASB), the Task Force on Climate-related Financial Disclosures (TCFD) and the Global Reporting Initiative (GRI), have been building standards and defining materiality to facilitate incorporation. The key performance indicators (KPIs) of businesses can be based on the work of these institutions and help to monitor progress towards desired sustainability goals actively.

Another important institution that has been working on building up common standards is the Platform on Sustainable Finance (PSF), which is a permanent expert group of the European Union Commission (Commission) to assist the development of its sustainable finance policies. This brings us to the EU.

Zooming into the EU

The EU is a trailblazer in sustainable finance. As Christine Lagarde, the President of the European Central Bank captures it: “By shifting the horizon away from the short term and contributing to a more sustainable economic trajectory, the financial sector can become a powerful force acting in our collective best interest” (Lagarde, 2020). According to the European Green Deal, adopted in 2020, the EU targets at least 50% and towards 55% greenhouse gas emission reductions by 2030 and net zero emissions by 2050. These targets are a “man on the moon moment”, as Ursula von der Leyen, the President of the European Commission, put it (Leyen, 2019). To put things in perspective: Between 1990 and 2019, emissions fell by 1% per year, which accelerated to almost 2% per year between 2007 and 2019, and the 2030 target requires that the decarbonisation rate doubles again, to almost 4% per year (Tol, 2021).

Capital needs to be mobilised not only through public policies but also by the financial services sector to reach these targets. For instance, Europe has to close a yearly investment gap of almost EUR 180 billion to achieve EU climate and energy targets by 2030 (European Commission, 2018).

Going beyond acknowledging the role of the financial services sector, especially under its 2018 Action Plan for Financing Sustainable Growth, the EU has pioneered two main pieces of legislation – the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation (TR) – which sit at the heart of the regulatory efforts.

SFDR was adopted by the European Parliament and the Council of the EU on 27 November 2019. It builds on the existing legal framework addressing the uptake and pursuit of the activities of undertakings for collective investment in transferable securities (UCITS), credit institutions, alternative investment fund managers (AIFMs), insurance undertakings, investment firms, insurance intermediaries, institutions for occupational retirement provision (IORPs), managers of qualifying venture capital funds (EuVECA managers), managers of qualifying social entrepreneurship funds (EuSEF managers) and providers of pan-European personal pension products (PEPPs). This framework ensures the more uniform protection of end investors and makes it easier for them to benefit from a wide range of financial products while at the same time providing rules that enable end investors to make informed investment decisions.

SFDR contributes to this by laying down harmonised rules for financial market participants (FMPs) and financial advisers on transparency with regard to the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes, and the provision of sustainability-related information with respect to financial products. In simpler terms, it requires the disclosure of specific information regarding the approaches to the integration of sustainability risks and the consideration of adverse sustainability impacts.

A sustainability risk is defined as an ESG event or condition that, if it occurs, could cause a negative material impact on the value of the investment, as specified in sectoral legislation or delegated acts and regulatory technical standards adopted pursuant to them.

SFDR is composed of twenty articles. Under Articles 3, 4 and 5, FMPs and financial advisers must publish and maintain on their websites specific information about their sustainability risk policies, adverse sustainability impacts and remuneration policies. Articles 6, 8, and 9 require pre-contractual disclosures on the integration of sustainability risks, the promotion of environmental or social characteristics, and sustainable investments. Under Article 10, based on the financial product, the FMPs might be required to disclose additional information on their website relating to the environmental or social characters and sustainable investments. Finally, Article 11 introduces the periodic reporting requirement for the promotion of environmental or social characteristics and of sustainable investments.

SFDR entered into force on 10 March 2021, therefore, the impact of the disclosures is yet to be assessed.

Turning to the Taxonomy Regulation (TR), it was agreed upon at the political level in December 2019 and was adopted by the European Parliament and the Council of the EU on 18 June 2020. It creates the legal basis for the EU classification system (or taxonomy) to provide the criteria for determining whether an economic activity qualifies as environmentally sustainable.

TR sets out three groups of Taxonomy users: (i) the FMPs offering financial products in the EU, including occupational pension providers, (ii) large companies who are already required to provide a non-financial statement under the Non-Financial Reporting Directive, and (iii) the EU and the Member States, when setting public measures, standards or labels for green financial products or green (corporate) bonds.

It establishes six environmental objectives: (i) climate change mitigation, (ii) climate change adaptation, (iii) the sustainable use and protection of water and marine resources, (iv) transition to a circular economy, (v) pollution prevention and control, and (vi) the protection and restoration of biodiversity and ecosystems.

Each objective can be significantly harmed. For instance, if an activity leads to significant greenhouse gas emissions, that constitutes significant harm to the climate change mitigation objective. Under Article 17, the TR lists all significant harms and substantiates the do no significant harm (DNSH) principle.

Furthermore, under Article 18, a “toolbox” of minimum safeguards is listed, which includes: (i) the OECD Guidelines for Multinational Enterprises, (ii) the UN Guiding Principles on Business and Human Rights, (iii) eight fundamental conventions identified in the Declaration of the ILO on Fundamental Principles and Rights at Work, and (iv) the International Bill of Human Rights.

An economic activity, then, qualifies as an environmentally sustainable economic activity where it (i) contributes substantially to one or more of the environmental objectives, (ii) does not significantly harm any of the environmental objectives, (iii) is carried out in compliance with the minimum safeguards, (iv) complies with technical screening criteria.

TR is designed to be supplemented by delegated acts which contain detailed technical screening criteria for determining when an economic activity can be considered sustainable. As mentioned earlier, the Platform on Sustainable Finance (PSF) was established to support the development of technical screenings. It has 57 members and 11 observers and continues to cover a range of sectors.

The first Delegated Act on Sustainable Activities for Climate Change Adaptation and Mitigation Objectives was adopted for scrutiny by the co-legislators on 4 June 2021. This was followed by the Delegated Act Supplementing Article 8 of the Taxonomy Regulation on 6 July 2021. Furthermore, the Commission approved in principle a Complementary Climate Delegated Act on 2 February 2022, addressing specific nuclear and gas energy activities. The EU Taxonomy Compass, which is the digital tool that visually represents the contents of the Taxonomy, can be viewed regularly to gain insights into the sector- and activity-specific standards.

Beyond the SFDR and TR, the EU Commission is continuing its work on environmental and human rights due diligence. Most notably, the Proposed Directive on Corporate Sustainability Due Diligence was published by the Commission on 23 February 2022. It requires companies to conduct environmental and human rights due diligence on their own activities, their subsidiaries’ activities, and the value chain operations carried out by companies they have established business relations with. These regulatory developments will continue to influence the decisions of the financial sector.

Zooming out: What does sustainable finance mean in international law?

Traditionally, international law has viewed businesses as possessing no international rights and duties (Cassese, 1986). This can be compared with the approach of domestic law, which accepts the legal personality of companies, sets legal obligations and holds companies accountable for breaches of these obligations. This can also be compared with the approach of international law to individuals whose rights are guaranteed under core international human rights treaties and other legally binding instruments (such as the International Labour Organisation Conventions). Individuals can also be tried under international law for committing one of the four international crimes as recognised under the 1998 Rome Statute. Regardless of the increasing attempts to cooperate with companies at the international level about issues regarding ESGs, as a rule of thumb, companies cannot be held accountable for their internationally wrongful acts under international law. This gap makes regional developments, such as in the EU, all the more important. Whether these developments are a part of a change towards accepting businesses as a subject of international law is to be seen.


Cassese, Antonio. 1986. International Law in a Divided World, 103.

Yildiz Noorda, Aylin. 2022. Climate Change, Disasters and People on the Move: Providing Protection under International Law (Brill).

Dr. Aylin Yildiz Noorda, Attorney at Law, works on sustainability. She holds a PhD in law from the World Trade Institute, University of Bern; an LL.M. degree from the University of Toronto; and LL.B. degrees from the London School of Economics (LSE) and University of Istanbul. She continues her research as a member of the World Trade Institute and the Oeschger Centre for Climate Change Research of the University of Bern.

Image: Robert Neubecker/ New York Times

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