How the EU financial market is being reshaped by growing demands for responsible business conduct across global value chains — from the European Green Deal to the taxonomy, green bonds and ESG disclosure.
The article summarises transformations taking place in the EU financial market under the influence of growing requirements for responsible business behaviour in global value chains, outlining the components of the European Green Deal and the interaction between climate protection and green finance in the EU.
Based on an analysis of the evolution and interrelationship between EU climate-protection initiatives and the main elements of the European Sustainable Finance Strategy, the authors conclude that the development of standards for 'green' financial products can contribute to the further development of finance focused on ESG market segments — helping investors identify products that, for example, meet low-carbon criteria.
The paper notes that around 70% of international trade is linked to GVCs, through which services, raw materials, parts and components often cross borders multiple times before entering the final product. The existence of environmental and social risks in GVCs — such as greenhouse gas emissions, hazardous waste, poor working conditions and child labour — raises concerns about how GVCs may amplify these risks, leading to growing calls to integrate responsible business conduct (RBC) into business practices.
To summarise transformations taking place in the EU financial market under the influence of growing requirements for responsible business behaviour in global value chains.
Logical, comparative, systemic and structural analysis enabling a scientific summarisation of the transformations under study.
The EU Sustainable Finance Strategy significantly improved the regulatory framework for ESG financial products through a precise taxonomy, greater transparency and amended market rules.
The need to rebalance the relative importance of financial and non-financial goals in the ESG strategy of GVCs, with a clear focus on environmental goals.
The Sixth Assessment Report of the IPCC provides yet another evidence-based study showing global warming of the atmosphere, oceans and land, largely caused by human activity. According to the IPCC, warming in Europe will continue to grow faster than global warming.
With a 3°C global warming level — and even with high adaptation — serious risks remain for many sectors in Europe: human mortality and morbidity and ecosystem disruption due to heat; losses in agricultural production from combined heat and drought; water scarcity; and the impact of flooding on people, the economy and infrastructure.
The number of deaths and people at risk of heat stress will increase two to three times at 3°C compared with 1.5°C. In the summer of 2022, heat waves killed more than 61,000 people across Europe. As climate change intensifies heat waves, countries have to consider new means of protecting their populations.
Relative deaths & people at risk of heat stress, by global warming level
Indexed to the 1.5°C level (=1×). At 3°C the figure rises to between two and three times that level, per the IPCC findings cited in the article.
The Paris Agreement, adopted in 2016, was a milestone in the multilateral climate-change process — the first time all countries committed to unite in combating climate change. Its goal is to keep the rise in global average temperature well below 2°C above pre-industrial levels and to continue efforts to limit it to 1.5°C.
The European Green Deal (EGD) brings together environmental and equitable transition goals to address the uneven impact of energy transition, reduce greenhouse-gas emissions and respond to climate and other environmental challenges by creating opportunities for all regions. It promotes integration between the EU's Territorial Agenda and key EU strategies, and envisages achieving EU climate neutrality by 2050. The green transformation of almost all economic actors is urgently needed — especially in energy production and consumption, mobility, industrial production and agriculture.
Reconstructed from Fig. 1 — Components of the European Green Deal [sources 10, 13–16]
Headline figures announced to finance the Green Deal (EUR)
€1 trillion total green-transformation investment; €750 bn Next Generation Fund; ~€350 bn additional annual energy-system investment to cut emissions 55% by 2030.
Expert estimate of supply-side energy investment required by 2050 (USD)
Estimated range of USD 1.6–3.8 trillion annually by 2050 on the supply side of the energy system.
Leading financial institutions, international organisations and banks now offer financial products that take sustainability factors into account at every stage of the investment process — confirmed by the ESG strategies developed by entities applying for funds.
Green finance is the financing of investments that provide environmental benefits such as reducing air, water and land pollution, reducing greenhouse-gas emissions, improving energy efficiency and mitigating and adapting to climate change.
In this context, climate finance refers to the financing of public and private investments aimed at supporting climate-change mitigation and adaptation, and can be considered a subset of green finance. In 2018 the European Commission established a High-Level Expert Group on Sustainable Development Finance, whose recommendations formed the basis of the European Action Plan on Sustainable Finance — further developed through the Updated Sustainable Finance Strategy and the April Package presented in early 2021.
Reconstructed from Fig. 2 — Interaction between climate protection and green finance in the EU [source 17]
The EU eco-labelling project for retail financial products can contribute to sustainable investment decisions for retail investors. The green bond market has continued to grow, particularly in the last five years: according to estimates, total issuance reached US$270 billion, showing an annual growth rate of 60% since 2015.
The European Green Bond Standard aims to create a voluntary, high-quality European standard available to all issuers to help finance sustainable investments — a first step toward a wider range of green financial products.
· Funds raised must be fully attributed to economic activities that are sustainable under the Taxonomy Regulation.
· The issuer must report annually in the European Green Bonds Allocation Report.
· Compliance monitored by external experts registered and supervised by ESMA.
· External reviewers publish pre-issue and post-issue reviews of the use of proceeds.
· At least once during the bond's maturity, a report on positive and potentially negative environmental impacts must be prepared. [18]
Total issuance growth indicated by the article (USD)
Illustrative trajectory modelling the stated ~60% annual growth rate since 2015, reaching the reported US$270 bn total issuance. Intermediate years are interpolated for visualisation only.
The taxonomy identifies six environmental objectives that can be used to classify economic activity as sustainable. It is a key element of the European Sustainable Finance Strategy, influencing the regulation of disclosures by both financial institutions and companies, as well as the green bond standard.
"Firstly, climate-change mitigation involves measures that reduce greenhouse-gas emissions in line with the goals of the Paris Agreement — for example, through increased use of renewable energy sources. Secondly, climate-change adaptation includes measures aimed at significant reduction of the negative impact of current and future climate change on people and nature (e.g. reforestation)." [19]
According to the Taxonomy Regulations, three types of economic activity are considered sustainable: activities that directly contribute to the identified Sustainable Development Goals; activities that support the achievement of such goals through technology or services; and transitional activities that contribute to the transition to a CO₂-neutral economy until technological alternatives are available.
Reconstructed from Fig. 3 — The mechanism of taxonomy regulation [source 19]
Low-carbon benchmarks are important in financial markets as references for the pricing of financial instruments and transactions — in credit, debt and derivatives markets across various asset classes. Benchmarks are also used to evaluate the performance of financial instruments and to determine financial liabilities arising from financial contracts.
The second pillar of the Sustainable Finance Strategy relates to disclosure requirements for financial institutions and corporates, allowing investors to make better investment decisions and providing other stakeholders with sustainability-related information.
According to a recent survey, many investors plan to double their sustainable assets over the next five years, with the "environment" factor a top priority — yet they note that the poor quality of ESG data is one of the biggest obstacles to increasing investment. Establishing an effective regulatory framework for non-financial reporting is therefore an important step to transform investor interest into real investment decisions.
The Sustainable Finance Disclosure Regulation (SFDR), which entered into force on 10 March 2021, establishes mandatory ESG disclosure requirements for asset managers and other financial market participants, requiring them to disclose how they integrate sustainability risks into their investment strategies.
The Delegated Disclosure Act defines specific sustainability-related KPIs for banks, asset managers, investment companies and insurers. The main indicator of credit institutions' performance will be the green asset ratio, reflecting the share of risks associated with taxonomic activities relative to total assets.
Gradual implementation due to extensive additional reporting requirements
Mandatory ESG disclosure requirements for asset managers and other financial market participants.
Non-financial firms disclose only the share of taxonomically consistent activities in total turnover, capital and operating expenses (1 Jan–31 Dec 2022).
More detailed disclosure obligations apply across corporate and financial reporting.
For some parts of the accounts, the disclosure obligations come into effect.
Calls for responsible business conduct in global value chains have been powerful drivers of economic growth in recent decades. Since the early 1990s, GVCs have transformed and accelerated international trade and investment by strengthening economic ties between countries.
Share of international trade that involves global value chains
About 70% of international trade involves GVCs, whereby services, raw materials, parts and components often cross borders multiple times before reaching the final product.
Increase in per-capita income per 1% rise in participation
World Bank estimates: a 1% increase in GVC participation raises per-capita income by more than 1% — much higher than the 0.2% from standard trade.
Over the past 30 years, the sharpest falls in poverty rates have occurred in countries that became an integral part of GVCs, enabling the convergence of living standards. The growth of GVCs is considered one of the most important features of economic globalisation in the 21st century — but along with creating value, GVCs have also generated massive greenhouse-gas emissions and pollution as a by-product in energy-intensive production stages. The increasing complexity and uncertainty of GVCs has made it difficult to understand "who is emitting for whom".
These risks have led to further backlash and calls to apply responsible business conduct and risk-based due diligence to mitigate negative impacts, particularly in supply chains.
Market-oriented companies, banks, insurance companies and other large unlisted firms with more than 500 employees are required to report on, among other things, environmental, human-rights and anti-corruption issues — disclosing the impact of their business activities and how they are working to achieve non-financial goals in each of these areas.
Sustainable finance plays a key role in achieving the goals of the European Green Deal and the EU's international commitments. The mechanism for achieving these goals is to redirect private investment toward projects that meet the criteria of sustainable development, climate neutrality and climate-change resilience.
The EU's Sustainable Finance Strategy has significantly improved the regulatory framework for ESG financial products by establishing a precise taxonomy, increasing transparency for both corporate and financial institutions, and amending financial-market rules.
The financial sector can reorient investments toward more sustainable technologies and businesses, financing growth in line with sustainable-development principles on a long-term basis and contributing to a low-carbon, climate-resilient and circular economy.
To accelerate the Green Deal, additional financial incentives should support environmental investments — for example, tax incentives for green investments such as accelerated depreciation for green capital expenditures in industry.
These developments are expected to reconfigure dominant GVCs. Four directions are noted as most likely in the literature: replication, diversification, regionalization and reshoring.
While RBC and ESG criteria already shape boardroom remuneration in some large public companies, goal-setting is often vague and qualitative — of little weight compared with KPIs measuring financial performance.
There is a need to rethink and revise the hierarchy of goals that determine the functioning of global value chains — shifting the emphasis from predominantly financial benchmarks to comprehensive non-financial goals, among which the environmental aspects of sustainable development should occupy a key place.
This approach involves integrating environmental factors into strategic planning, risk management and the assessment of GVC effectiveness. One promising tool is the introduction of technical criteria for compliance with the ecological taxonomy, allowing a unified system for assessing environmental performance — making it possible to clearly identify strategic environmental goals, formalise quantitative and qualitative indicators of their achievement, and ensure transparency and objectivity in monitoring environmental performance at all stages of the functioning of value chains.
Full list of sources cited in the article, as published.