Baranga Laurentiu
Baranga Laurentiu
Baranga Laurentiu
Abstract
Sustainable finance represents an important concern of the European Union lately,
having an essential role in achieving the political objectives of the European Climate
Pact. It is interpreted that it supports the sustainable development of economy,
simultaneously reducing the pressures on environment and taking into consideration
social and governance aspects.
The scope of sustainable finance is to improve the financial sector in the context of
fighting against climate changes. Considering this purpose, the ESG factors
(Environmental, Social and Governance) must be considered in the decisional process
regarding the investments of the financial entities, promoting long-term investments in
sustainable economic activities and projects.
There are many legislative actions at the European level, transposed into national
legislation or with direct applicability in Romania for determining developing
sustainable economies that beneficially impact the environment and climate changes.
The action plan of the European Commission regarding developing a strategy for the
sustainable finance contains ten initiatives grouped into three chapters: reorienting cash
flow to a more sustainable economy, including sustainability elements in risk
management, encouraging transparency and long-term vision.
Keywords
ESG, environment, social, governance, scoring.
JEL Classification
G30, G41, M14, Q50
Introduction
ESG represents environmental, social and governance factors which can affect the
financial performance of an entity.
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Corresponding author, Laurențiu Paul Barangă – barangalp@yahoo.com.
1. Literature review
The ESG problematics are new and for that reason, the literature does not include many
researches regarding the impact of these topics on all the stakeholders identified by the
new EU regulations issued to apply the European Climate Pact.
According to Henisz, W. et al. (2019), a strong ESG proposition can create value for the
business, improving equity returns and linking to cash flow in five important ways:
facilitating top-line growth, reducing costs, minimising legal interventions and
regulations, increasing employee productivity, optimising investment and capital
expenditures.
A study made by Broadstock, D.C. et al. (2021) about the impact of the ESG during the
COVID-19 financial crisis in China, showed that ESG performance lowered financial
risk, considering CSI300 constituents.
However, a research realized by Prol, J.L. et al. (2022) concluded that optimized ESG
equity portfolios in the NYSE for two years provided a lower return and lower volatility
that the less optimized ones.
Given its new character, there are several concerns arising about ESG disclosure:
ensuring consistency and relevance in reporting frameworks, the elements of ESG
scoring, understanding performance and materiality, transparency and public and
regulatory engagement, as mentioned by Boffo, R. et al. (2020).
2. ESG benefits
Strong implementation of the ESG framework can create value for the business,
improving equity returns and linking to cash flow in five important ways: facilitating
top-line growth, reducing costs, minimising legal interventions and regulations,
increasing employee productivity, and optimising investment and capital expenditures.
Top-line growth - A strong ESG proposition helps entities to achieve new markets and
to expand into existing ones. When companies gain government authorities trust, they
are more likely to get approvals, licenses and access that provide growth opportunities.
Cost reductions - ESG implementation can also contribute to costs reduction, by
lowering energy consumption and reducing water waste.
Reduced legal interventions and regulations - As mentioned before, gaining
government authorities trust can be beneficial to the companies, helping them to achieve
greater strategic freedom and less regulatory pressure. This can lead to earning
government support in future actions, for example obtaining subsidies.
Employee productivity increase - A strong ESG perspective can attract and retain
quality employees, boost employee motivation and increase productivity.
Investment and capital expenditures optimization - ESG approach can improve
investment returns by using capital in more sustainable actions that are beneficial to the
entity for a long-term period.
In addition to those presented above, there are also the following benefits brought by the
implementation of ESG principles: ensuring consistency and relevance in reporting
frameworks; ESG scoring; understanding performance and materiality; transparency;
public and regulatory engagement.
Ensuring consistency and relevance in reporting frameworks - The recent years had
provided multiple ESG frameworks and given the fact that there is not a global standard
for ESG, each company has to be careful in disclosing ESG information, aligning with
the reporting frameworks and keeping updated with all the changes, ensuring
consistency and relevance in what they report.
ESG scoring - ESG scoring appeared as a necessity to ensure protection of the investors
and to allow comparability through companies to know which one promotes a better
‘green’ vision and which one is better to invest in. However, establishing ESG scores is
3. ESG reporting
ESG reporting represents the disclosure of environmental, social and governance
information. This has the purpose to improve transparency to the investors and
determining the companies to give attention to the climate changes, by implementing
specific actions and eliminating greenwashing. The ESG reporting is defined through
the following regulatory: the EU Taxonomy, the Sustainable Finance Disclosure
Regulation (SFDR), the proposal for Corporate Sustainability Reporting Directive
(CSRD).
EU Taxonomy establishes a unified understanding of environmentally sustainable
economic efforts in the EU through a system for classifying sustainable activities and
setting performance thresholds, represented by technical screening criteria for six
environmental goals: mitigation of climate change, adaptation to climate change,
sustainable use and protection of water and marine resources, the transition to a circular
economy, prevention and control of pollution, protection and restoration of biodiversity
and ecosystems.
The purpose of the SFDR Regulation is to achieve greater transparency on sustainability
in the financial services sector by setting out obligations to suppliers and distributors of
financial products and services to inform the customers about the impact of
Conclusions
During the research, we learned that, in the long term, the benefits brought to the
investment advisors, entities, issuers and environment are worth the efforts made in
assimilating and familiarizing with the new regulations regarding ESG. The research is
based on the current regulations issued so far, our recommendation being to extend it
when the other ESG related standards (proposal for a Directive on corporate
sustainability due diligence and annex, proposal for Corporate Sustainability Reporting
Directive – CSRD, proposal for European Green Bond Regulation – EuGBR, proposal
for other delegated acts in the form of Regulatory Technical Standards – RTS) will be
published.
References
[1] Boffo, R., and Patalano, R. (2020). ESG Investing: Practices, Progress and
Challenges, OECD Paris, www.oecd.org/finance/ESG-Investing-Practices-Progress-
and-Challenges.pdf
[2] Broadstock, D.C., Chan, K., Cheng, L.T.W., and Wang, X. (2021). The role of ESG
performance during times of financial crisis: Evidence from COVID-19 in China,
Finance Research Letters, Elsevier, Volume 38
[3] Henisz, W., Koller, T., and Nuttall, R. (2019). Five ways that ESG creates value,
McKinsey Quaterly, November 2019
[4] Prol, J.L., and Kim, K. (2022). Risk-return performance of optimized ESG equity
portfolios in the NYSE, Finance Research Letters, Elsevier, Volume 50
[5] * * * Communication from the Commission to the European Parliament, the
European Council, the Council, the European Economic and Social Committee and the
Committee of the Regions - The European Green Deal (COM/2019/640 final)
[6] * * * Official Journal of the European Union, L 282, 19 October 2016 – Paris
Agreement
[7] * * * Regulation (EU) 2019/2088 of the European Parliament and of the Council
on sustainability‐related disclosures in the financial services sector
[8] * * * Regulation (EU) 2020/852 of the European Parliament and of the Council on
the establishment of a framework to facilitate sustainable investment, and amending
Regulation (EU) 2019/2088 (Taxonomy Regulation)
[9] ASF – Sustainable Finance-Green Transition. Available at:
https://asfromania.ro/en/a/2243/sustainable-finance---green-transition
[10] BVB Research Hub. Available at:
https://bvbresearch.ro/ReportDashboard/ESGScores
[11] Renewed sustainable finance strategy and implementation of the action plan on
financing sustainable growth. Available at: