Sustainable finance in the Principality. Monaco’s financial industry is both a pioneer and a model in the field of sustainable finance (referring to the process of taking social and environmental considerations into account in financial markets. Climate change has made the environmental aspect particularly significant).
First, a pioneer
Initiatives that seek to make the financial system greener and direct financial flows towards clean, sustainable growth have been in development in the Principality for many years. The Monegasque State led the way with the management of the Constitutional Reserve Fund beginning in the early 2000s. There were two funds at that time: Monaco Eco+ (managed by Compagnie Monégasque de Banque) and MC2D (managed by CFM Indosuez Wealth). Since then, green investments have been diversified, through the Terra Munda fund, for example. Following on from this, H.S.H. Prince Albert II played a significant role in the Paris Climate Conference, better known as COP 21, in December 2015.
Second, a model
The Paris Conference led to the first legally binding agreement on climate change between 190 countries (for Monaco, see Sovereign Ordinance No. 6.200, dated 16 December 2016, which promulgated the Paris Agreement). The signatories committed to making “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.” In the Principality, a Monaco Sustainable Finance working group with representatives from the State and the Monaco Association for Financial Activities (AMAF) was recently set up.
Regulating sustainable finance
The increasing importance of environmental considerations in finance raises a legitimate question about the relevant legal framework. This legal framework currently has two features:
- imperative (there is a European regulatory foundation); and
- incentivising (collaboration and certification of financial institutions in Monaco).
European regulatory foundation: the hard law of sustainable finance
Signature of the Paris Agreement helped to give substance to two major pieces of legislation promoting sustainable finance:
- Regulation 2019/2088 of 27 November 2019 on sustainability‐related disclosures in the financial services sector (the “Disclosure Regulation”);
- Regulation 2019/2089 of 27 November 2019 on European Union Climate Transition Benchmarks (amending the “Benchmark Regulation”).
The fight against climate change and environmental risks, a new opportunity for the financial markets, must be combined with the traditional requirements of financial law: protecting savers and guaranteeing the integrity of the financial markets. In particular, these regulations seek to avoid greenwashing practices, which are intended to mislead investors as to the actual contribution of issuers and products with respect to green commitments.
The readability of financial reporting is critical. Reporting must be issued in common languages and to common standards. The European authorities have therefore worked to develop a common terminology base. This is the purpose of Regulation 2020/852 of 18 June 2020, the “Taxonomy Regulation”, which establishes a classification system for investments to determine if an economic activity is environmentally sustainable. This matrix allows issuers to position themselves, asset management intermediaries to define their product ranges, and investors to choose where their funds will go.
Labels and certifications: the soft law of sustainable finance
Investors’ growing interest in environmental issues has led professionals to establish their own tools. The bond market developed the Green Bond Principles, which were more recently replaced by the Sustainability-Linked Bond Principles. In addition, issuers and investment funds are making more and more use of certification. The profusion of national certifications can cause confusion, and more transparency is required in this area. To this end, the creation of a European certification for environmental, social and governance (ESG) funds is being promoted.
In a similar vein, Jean Castellini, the Minister of Finance and Economy, has proposed the introduction of “sustainable investment training”, borrowing from the professional certification for financial activities (https://www.monacoforfinance.mc/en/articles/products-and-services/1344-monaco-s-financial-place-will-soon-be-a-model-of-sustainable-finance.html).
Sustainable finance: from suggested to imposed ethics
In conclusion, it is worth noting that sustainable finance is based primarily on a voluntary approach. Of course, investors are, as before, speculating to make money, but they also want to see their investments contributing to raising standards in terms of protecting the environment, safeguarding biodiversity or defending employee rights.
The legal framework for green finance derives from the same voluntary logic. It is the result of a combination of institutional encouragement and voluntary commitment, a swing between ethics suggested by various institutions and ethics which are imposed by the various stakeholders. This legal framework is gradually taking shape.