Understanding the EU Sustainable Finance Regulation (1/4) - What does it seek to achieve?
If the words “taxonomy”, “sustainable preferences questionnaire”, “MiFID II”, and “negative impact investment” ring a bell, it’s no wonder. They feature prominently today’s world of finance, and are front and centre in banks’ communication with their clients. So what do they all have in common? They form part of the vocabulary of the EU’s extensive sustainable finance regulation. In this series of articles, we will break down the regulation’s goals, underlying concepts, and terminology. Starting with what this EU regulation sets out to achieve, thanks to our expert, Claire Douchy, Head of Corporate Commitments and Responsible Projects for Societe Generale Private Banking France, who spoke to Catherine Volkoff, the private bank's Director of the ESG(1) Regulatory Project.
Claire Douchy: Catherine, what are the key characteristics of what is an incredibly vast sustainable finance regulation by the EU?
Catherine Volkoff: Let’s start with the context. The regulation is part of a wider programme called the “European Green Deal”, which is essentially the European Commission’s road map for the environment, with impacts on multiple economic sectors, including the financial sector. The goal is to redirect capital flows to “sustainable” investments in order to finance “green” activities which contribute significantly to mitigating climate change.
Claire Douchy: What does this redirecting of capital to “sustainable” investments involve?
Catherine Volkoff: The idea is that the more we invest in “green” activities, the more activities not considered as sustainable will be disregarded. Regulators want savers to have the information they need to invest in activities that meet their sustainability preferences — and with total transparency. Savers are increasingly expressing their desire to be actors of change. Regulators therefore expect those structuring and distributing savings products to respond by gradually moving away investments in unsustainable activities, in favour of activities that are sustainable.
Claire Douchy: What are the conditions of deploying the regulation?
Catherine Volkoff: As a first step, the EU regulators defined what exactly constitutes a “green” economic activity — a classification known as the “Green Taxonomy”. Then they established the framework for true transparency on the sustainable characteristics of financial products. Finally, they required producers and distributors of savings products, banks, and financial advisers alike to meet savers’ sustainability preferences.
Claire Douchy: How is this requirement to meet savers’ sustainability preferences enforced?
Catherine Volkoff: This is the very objective of the new sustainabilaity preferences questionnaire, set out under MiFID II(2). From now on, financial intermediaries are required to ask their investors and savers very clear questions in order to identify their preferences in the area of sustainable finance.
Claire Douchy : How do they do this?
Catherine Volkoff: At Societe Generale Private Banking, we have opted for a two-step questionnaire. First, the client must choose from a selection of suggested profiles the profile that best matches their sustainable investment preferences. We have defined three profiles: either the client wishes to invest without any particular sustainable investment preferences; or they are sensitive to sustainability issues and opt for a “generic profile” comprising predefined preferences that align with Societe Generale Private Banking’s sustainability policy; or they opt for a “personalised” profile in order to invest in financial products and services that fit their own preferences. If the client chooses the third, personalised option, they move onto the second step to express their exact criteria.
Claire Douchy: What does that entail? What are the criteria?
Catherine Volkoff: Clients wanting to personalise their preferences will need to define what percentage of their financial assets they want to invest in sustainable activities by choosing one or more of three approaches: “global sustainable investment”; “environmentally sustainable investment”; and “negative impact investment”. Under the global approach, the client aligns a portion of their financial assets with a set of sustainable activities, without choosing a specific ESG theme, and therefore with the SFDR(3). Under the environmental approach, they align their investments with activities that contribute to a purely environmental theme. Here their investments correspond with the EU Green Taxonomy. And under the negative impact approach, the client invests in a way that reduces negative impacts on one or more sustainability criteria of their choice.
Interested to know more? Read the next three articles of our series Understanding the EU Sustainable Finance Regulation:
SGPB’s 3 sustainability investment approaches: “global sustainable investment”
SGPB’s 3 sustainability investment approaches: “environmentally sustainable investment”
SGPB’s 3 sustainability investment approaches: “negative impact investment”
... and feel free to contact your Private Banker for more information.
(1) Environmental, Social, Governance.
(2) MiF I (Markets in Financial Instruments) is a European directive adopted in 2004 and applied in 2007. A regulatory framework of the financial markets, it enforces the investment service providers to classify and inform clients. After the 2008 financial crisis, the European Commission decided to review MiF I, voting in MIF II in 2014. The purpose of the updated directive is to protect individual investors as well as improve the transparency, security, and operation of the financial markets. (Source :
(3) The Sustainable Finance Disclosure Regulation (SFDR) is a European regulation aimed at improving transparency related to environmental and social responsibility on the financial markets. Under the SFDR, all products must be classified according to their sustainability characteristics.
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