International agreements have set ambitious goals for the energy transition that will require an estimated US$44 billion in global investments by 2030.

Yet as stakeholders attempt to catalyze such investment, they face significant challenges – from greenwashing concerns to evolving regulations and political backlash.

Sustainable finance to date has been provided primarily via a mixture of green loans and green bonds (use-of-proceeds products) and sustainability-linked loans and bonds (performance-linked products). The Loan Market Association (LMA) and the International Capital Market Association (ICMA) host voluntary Green Loan Principles, Green Bond Principles, Sustainability-Linked Loan Principles and Sustainability-linked Bond Principles with accompanying guidance which lay out standards for loans and bonds purporting to be sustainable. The Principles are backed by a global initiative bringing together market participants and stakeholders from private and official sectors.  The range of sustainable finance products is however growing to include sustainable trade and export finance, sustainability-linked derivatives and more.

The next few years will be crucial to the sustainable investment sector and new developments in the European Union (EU), the United States (U.S.), and the United Kingdom (UK) may be a taste of what’s to come. Here are some key trends business leaders and investors should be tracking:

EU standards provide structure and guidance for investors

The European Commission’s Sustainable Finance Action Plan lays out a strategy to strengthen the EU’s connections between finance and sustainability, with the goal to reorient capital flows toward a more sustainable economy, make sustainability a mainstream component of risk management, and foster transparency and long-termism around sustainability in the financial sector.

The Plan’s first key action item, developing a clear and detailed taxonomy system for “economic activities that are aligned with a net zero trajectory by 2050 and broader environmental goals”, was accomplished in 2020. It now informs two new pieces of regulation coming into force as part of the plan: the EU Green Bond Standard and the Corporate Sustainability Reporting Directive.

The long-awaited EU Regulation on European Green Bonds (EuGB) entered into force in December 2023, with most of the provisions set to apply  from December 2024. The Regulation on EuGB creates a gold standard, also known as the EU Green Bond Standard and any bond designated as a European green bond” or “EuGB” will have to comply with the requirements set out in the Regulation. In addition, there are also optional  sustainability disclosure requirements for bonds marketed as environmentally sustainable and sustainability-linked bonds that relate to  environmentally sustainability objectives. By creating a gold standard for EU green bonds, the Regulation on EuGB aims to improve market efficiency whilst making it easier for investors to compare bonds in the wider green bond market, thereby helping fight greenwashing.

Additionally, in 2024 a subset of large companies both operating and based in the EU will be subject to the region’s Corporate Sustainability Reporting Directive (CSRD), which requires comprehensive disclosures on the impact of a company’s business on people and the environment, as well as sustainability issues affecting the business.

The CSRD significantly expands the scope of reporting requirements, introduces additional sustainability reporting standards, and adds an audit requirement. Companies will also need to disclose certain environmental-related key performance indicators in accordance with the Taxonomy Regulation.

These requirements will have important downstream impacts: with improved data made available through these disclosures, investors will be able to gather better information to drive green investments and make progress toward clean energy goals.

Under the UK’s Green Finance Strategy, the UK Government committed to mandatory reporting aligned to the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). HM Treasury also launched the Transition Plan Taskforce to develop the gold standard for private sector transition plans and is developing a UK Green Taxonomy

Political uncertainty in the U.S. and UK complicates sustainable investments

Political uncertainty around sustainable finance poses a serious risk to the long-term investments necessary to facilitate the energy transition. New infrastructure projects in power generation and storage, for example, will take years just to come online, let alone yield returns to investors – making consistent policy crucial.

Yet, the U.S. is seeing significant political pushback and polarization to environmental, social, and governance initiatives (ESG) that threaten to disrupt the green investment calculus. Policy varies considerably depending on the state and the political party in control of Washington, as evidenced by the U.S.’s hasty decision to leave – and then rejoin – the Paris Agreement in the space of little more than a year. While the federal government is now in the midst of a sustainability push, many investors rightly wonder if a change in political winds would bring a swift end to such lucrative subsidies – potentially jeopardizing the viability of their investments.

While the situation in the UK may not be as politically fraught, there is still substantial uncertainty surrounding the Government’s policy approach to the clean energy transition. The overall sustainable investment policy framework, as well as specific policy goals and industry targets, may change, complicating the environment for investors seeking to prioritize complex, expensive, and long-term issues like electric vehicle charging infrastructure.

The future of sustainable finance

From enforcement against greenwashing to the state of economic incentives, stakeholders are walking a tightrope when it comes to encouraging investments in a sustainable future. Investors should closely monitor the changing regulatory landscape to protect their investments and support a greener future.

Investors will be able to gather better information to drive green investments and make progress toward clean energy goals.