Sustainability in the financial sector
Sustainable finance is understood in particular to refer to financial services in which the financial intermediaries integrate sustainability criteria, often referred to as environmental, social and governance (ESG) criteria, into their investment decisions. The objective is to achieve a sustainable benefit for clients, the environment and society. Sustainability in the financial sector is about the contribution made by the financial markets to social, environmental and economic change for the good of the planet and its inhabitants. Currently, environmental and climate risks constitute the largest area of focus.
Sustainability was first addressed as a topic at the United Nations Conference on the Human Environment (UNCHE) in Stockholm in 1972. Further key milestones were the UN Earth Summit (UNCED) in Rio de Janeiro in 1992 and the third UN Climate Change Conference in Kyoto in 1997 (COP 3). A further particular key date is the Paris Agreement of 2015. This is a binding agreement of the 197 parties to the convention, which include not only individual countries but also the European Union (EU). In the Agreement, the parties commit to the common objective of holding the increase in global average temperature to well below 2 °C above pre-industrial levels and generally reducing emissions. Finance flows are also to be diverted for the specific purpose of achieving the climate objectives. Many countries, the EU, and numerous organisations and international bodies (such as the IOSCO and the UN) have accepted and committed to achieving the objectives of sustainable development.
State of discussion in the EU
The EU has committed to the climate objectives of the UN’s 2030 Agenda and recognises the importance of a sustainable and resource-efficient economy. The European financial system has a key role to play in achieving these objectives. Consequently, in 2018 the EU published its action plan “Financing Sustainable Growth” in regard to the UN’s 2030 Agenda. The action plan includes a range of legislative initiatives and non-legislative measures to encourage sustainable economic activities and environmentally friendly financial products, and to take account of sustainability in the provision of financial advice and in the supervisory structures. A package of regulations on taxonomy, transparency and benchmarks is currently being prepared.
Current situation in Liechtenstein
In June 2017, the Landtag of the Principality of Liechtenstein ratified the Paris Agreement, which will replace the Kyoto Protocol from 2020 onwards. Consequently, the Principality has committed to a target of reducing emissions by 40% compared with 1990 by 2030. The government attributes great importance to sustainable finance in its financial centre strategy. The Liechtenstein Financial Market Authority (FMA) regards sustainability of the financial sector as a key topic that will become increasingly important in the licensing process and for supervision:
- In the scope of risk management, in which sustainability risks will have to be qualified;
- At the level of investments, where an assessment of whether or not the investment is truly sustainable will be required;
- In the context of ensuring financial stability; the European Systemic Risk Board considers climate related risks to be a new risk for financial stability.
Irrespective of the upcoming implementation of regulations in the EEA, the FMA had already started work on this topic. The FMA is tracking the status of European implementation through its representatives within European supervisory authorities and is already making preparations of both technical and supervisory nature to ensure having a smooth-running process in place when it comes to the implementation of the regulations in the EEA.
An analysis of all Liechtenstein funds carried out in 2016 delivered satisfying results. It shows that numerous Liechtenstein equity funds already fulfil ESG criteria to a large extent.