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Sustainable Finance
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Sustainable Finance

The term sustainable finance encapsulates the following: 
i. Re-channelling of private capital to more sustainable investments,
ii. Fostering sustainable economic growth and long term economic development,
iii. Ensuring the stability of the financial system,
iv. Strengthening transparency, and 
v. Managing the risks stemming from environmental and social issues. 
Responsible investments are paramount in alleviating environmental degradation and social inequality, which in effect contributes to achieving long-term financial and economic activity.
Climate change and other Environmental, Social and Governance (“ESG”) factors pose risks to the financial sector and to financial stability. 
ESG factors may indirectly affect the companies’ results as a consequence of financial impact emanating from non-financial performance. As a consequence of this, ESG factors may also affect the performance of investment portfolios.
The structuring of investment portfolios by taking into account also the ESG factors may contribute to achieving a better performance in the long-run.
The incorporation of ESG factors into the asset selection and risk management process requires relevant expertise, analytical capabilities and data availability.
Companies might not fully understand their social and environmental responsibility and the relevance of ESG factors to their performance (directly and indirectly for their non-financial and financial performance respectively).
In addition to the above, fund managers might not be able to appreciate the impact of responsible investments to their long-term performance or might not have access to reliable and comparable ESG related data.
The two important political milestones were the adoption of the UN 2030 agenda and sustainable development goals and the Paris climate agreement. The Paris climate agreement includes references linking the financial services to the transition to an environment-friendly development.
Sustainable finance is one of the top priorities of the EU, under the European Green Deal and the Capital Markets Union. The European Green Deal is the EU’s action plan towards becoming climate neutral by 2050, whereas the Capital Market Union, is an EU initiative aiming to deepen and further integrate the capital markets of EU member states.
At EU level the following legislative initiatives were undertaken:
  • The amended Benchmark Regulation, which introduces the EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks. The amended Benchmark Regulation entered into force in late 2019. The amendments aim to ensure that the labels ‘EU Climate Transition Benchmark’ and ‘EU Paris-aligned Benchmark’ are reliable and easy for investors across the Union to recognize; and that only benchmark administrators that comply with the requirements laid down therein should be eligible to use those labels when marketing EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks in the European Union. All benchmark administrators, with the exception of administrators of interest rate and foreign exchange benchmarks, are required to disclose in their benchmark statement whether or not their benchmarks or families of benchmarks pursue ESG objectives; and whether or not the benchmark administrator offers such benchmarks. In the affirmative, an administrator shall develop, operate and administer the benchmark and its methodology transparently and publish or make available, inter alia, an explanation of how the key elements of the said methodology reflect ESG factors for each benchmark or family of benchmarks, subject to the aforesaid exception of interest rate and foreign exchange benchmarks. Where no EU Climate Transition Benchmark or EU Paris-aligned Benchmark is available in the portfolio of that individual benchmark administrator, or the individual benchmark administrator has no benchmarks that pursue ESG objectives or take into account ESG factors, this shall be stated in the benchmark statements of all benchmarks provided by that administrator.
The amended Benchmark Regulation entered into application on 30 April 2020, whereas relevant delegated acts were published in the Official Journal of the European Union on 3 December 2020 and entered into application on 23 December 2020.
  • The Taxonomy Regulation, which establishes the criteria for determining whether an economic activity is environmentally sustainable for the purposes of establishing the degree of environmental sustainability of an investment. As regards asset management, the said Regulation applies in broad terms to asset managers under MiFID II, the UCITSD, the AIFMD and the financial products under their management as well as to other EU branded AIFs. As per the relevant provisions, an economic activity shall qualify as environmentally sustainable where that economic activity cumulatively:
Contributes substantially to one or more of the environmental objectives set out in the Taxonomy Regulation;
Does not significantly harm any of the said objectives;
Is carried out in compliance with the minimum safeguards laid down in Article 18 of the Taxonomy Regulation, which shall be procedures implemented by an undertaking that is carrying out an economic activity to ensure the alignment with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights; and
Complies with technical screening criteria that have been established by the Commission as further provided in the Taxonomy Regulation. 
Where an individually or collectively managed portfolio invests in an economic activity that contributes to an environmental objective, information, as per the provisions of Article 5 of the Taxonomy Regulation, has to be provided on the environmental objective or environmental objectives to which the said activity contributes; and a description of how and to what extent the investments of the said portfolios are in economic activities that qualify as environmentally sustainable, within the meaning of the Taxonomy Regulation. 
In addition to the above, under Article 8 of the Taxonomy Regulation, issuers of financial instruments that are required to publish non-financial information under the Non-Financial Reporting Directive, are required to include information on how and to what extent their activities are associated with economic activities that qualify as environmentally sustainable under the Taxonomy Regulation. To this end, they are required to disclose the proportion of their turnover, capital expenditure and operating expenditure associated with economic activities that qualify as environmentally sustainable. 
On 1 March 2021, ESMA has published its Final report on advice under Article 8 of the Taxonomy Regulation, which covers the information to be provided by non-financial undertakings and asset managers to comply with their disclosure obligations above.
The Taxonomy Regulation was published in the Official Journal of the European Union on 22 June 2020 and entered into force on 12 July 2020. However, some of its Articles will apply either from 01.01.2022 or from 01.01.2023 depending on the environmental objective in question.
  • The Regulation on Sustainability Related Disclosures in the Financial Services Sector (“SFDR”), which lays down EU-wide harmonised rules for financial market participants and financial advisers on transparency with regard to the integration of sustainability risks, including the consideration of adverse sustainability impacts in their processes and the provision of sustainability‐related information with respect to financial products provided for therein. From an asset management perspective, it applies to the same actors and products as the Taxonomy Regulation. This Regulation aims to reduce information asymmetries in principal‐agent relationships with regard to the integration of sustainability risks, the consideration of adverse sustainability impacts, the promotion of environmental or social characteristics, and of sustainable investment. The SFDR aims to achieve this by requiring the financial services professionals determined in this Regulation, to make pre‐contractual and ongoing disclosures to end investors, when they act as agents of those end investors (principals). The sustainability disclosures required under the Disclosures Regulation apply in addition to the pre-contractual and ongoing disclosures already required under the applicable sectoral legislation. 
The Disclosures Regulation is already in force but will apply from 10 March 2021.
  • The Non-Financial Reporting Directive (“NFRD”), which lays down the rules on disclosure of non-financial and diversity information by large companies. This directive amends the accounting directive 2013/34/EU and inter alia provides that large Public Interest Entities, namely companies listed on a regulated market, banks, insurance companies and other companies designated by national authorities as public-interest entities (“PIEs”), with more than 500 employees, have to publish annually a non –financial statement  containing  information relating to at least:
Environmental matters;
Social and employee matters;
Respect for human rights;
Anti-corruption and bribery;
The relevant provisions have been transposed into National Law, by means of Articles 151 Α –Β of the Companies’ Law and are already applicable.
In addition, companies listed on a regulated market must provide a description of the diversity policy applied in relation to the company’s board (in terms of age, gender, educational and professional background- Article 151 of the Companies’ Law)
The European Commission issued in 2019 guidelines on climate-related reporting, supplementing the Guidelines on Non-Financial Reporting issued in 2017, pursuant to NFRD, on the disclosure of non-financial and diversity information by certain large companies and groups.
The supervision of non-financial reporting does not currently fall under the CySEC competence at national level. However, at EU level non-financial reporting falls under the competence of the European Securities and Markets Authority, where CySEC participates in the relevant working streams. To this end, CySEC is monitoring non-financial reporting at national level in the context of informing its EU duties.
  • The Draft amendment in MiFID II (by means of amending Delegated Regulation 2017/565), aiming at allowing investors to specify their ESG preference and obliging MiFID firms to take these preferences into account.


  • The Draft AIMFD and UCITS amendments, aiming at including sustainability risks and factors in fund management and their investment strategies.
More information on the EU approach on sustainable finance and on further developments can be found here
Sustainable finance is one of the key consideration in CySEC’s policy making and strategic planning which is formulated in accordance with CySEC’s vision and mission.
Our approach on sustainable finance has three main pillars:
1. Authorisation and Supervision;
2. Education and encouragement of relevant innovation; and
3. Policy making at EU level.
CySEC’s objective is to protect the investors’ interest by ensuring that firms falling under its supervision comply with the relevant legislation. This is achieved through the authorisation process and supervision.
CySEC considers the risks of mis-labeling, mis-representing and mis-selling to be particularly relevant in the case of sustainable finance. Such risks are encapsulated in the term Greenwashing. CySEC’s role is to ensure that investors are not being misled by unscrupulous firms and in case that such cases are identified that there are strict consequences for such firms.
CySEC’s aim is to help building the understanding of market participants on sustainable finance. Where deemed necessary, CySEC may proceed with seminars, guidance and recommendations. An enhanced understanding amongst market participants will contribute to creating a robust and compliant benchmark on data quality and green labelling.
CySEC will also provide support through the CySEC Innovation Hub to entities innovating in the area of Green Fintech. Such entities may contribute to sustainable finance through the development of solutions that automate and enhance the analytical capabilities of firms when dealing with ESG information.
CySEC works in close collaboration with both the European Securities and Markets Authority (“ESMA”) and other national competent authorities, primarily through participating in ESMA taskforces and standing committees. In this context, CySEC has an active role in the elaboration and issuance of Technical Standards, Guidelines, Q&As and other convergence tools. When deemed appropriate by Government Departments of the Republic of Cyprus, CySEC also participates in working groups of the Council of the European Union, where the EU rules governing the investment sector are formulated.
ESMA has published its strategy on sustainable finance on 6 February 2020. The ESMA strategy envisaged a clear plan for relevant actions, including actions in relation to the EU single rulebook.
Further information on ESMA’s approach on sustainable finance can be found here.

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