How-to guide: An introduction to sustainable finance

Introduction

This how-to guide provides an introduction to sustainable finance and the relevant legal drivers in this area. It will be useful for in-house counsel, private practice lawyers, financial services specialists, procurement professionals and board members.

This guide covers the following:

The meaning of sustainable finance
The importance of sustainable finance
Legal drivers in sustainable finance
Key frameworks, standards and guidelines for sustainable finance
Sustainable finance for organisations
Issues for in-house counsel to consider

It can be read in conjunction with How-to guides: Understanding environmental, social and governance (ESG), What general counsel (GC) need to know about environmental, social and governance (ESG) and How to consider and navigate the consequences of ESG risks.

Section 1 – The meaning of sustainable finance

Sustainable finance is a way of considering environmental, social and governance (ESG) factors when making investment decisions and, as a result, investing in more sustainable economic activities. The concept of sustainable finance is closely linked with attempts both in the EU and worldwide to reach a net-zero economy.

1.1 Sustainable finance and ESG

In addition to its environmental connotations, sustainable finance is impacted by the other pillars of ESG. For example, investment decisions might be influenced by the goal of mitigating potential or actual adverse human rights impacts in the global economy (typically falling within the ‘S’ pillar of ESG), or by principles of anti-corruption and anti-bribery in business (the ‘G’ pillar).

More specifically, sustainable finance involves investment decisions that favour the following:

Environmental activities that mitigate the environmental impact of an organisation’s business activities across its operations and supply chain. This could include waste and natural resources management, carbon footprints and greenhouse emissions, deforestation, climate change and pollution mitigation and any other environmental risk and impact associated with an organisation’s operations.
Social considerations relating to how an organisation’s business activities impact people. The social aspect of ESG captures the full range of human rights and labour standards with respect to workers, communities, and vulnerable individuals, from occupational health and safety, living income and decent working hours to modern slavery and human trafficking.
Governance-related processes and policies capturing business structure and logistics, recruitment processes, codes of conduct, salaries and living wages, diversity and inclusion, decision-making, anti-corruption and transparency, board representation and effective systems to address ESG issues.

Section 2 – The importance of sustainable finance

The principal driver for sustainable finance is the increased global concern over climate change and the need to reverse the damage of its effects (see the European Commission’s website). There has been an increase in extreme weather events driven by rising temperatures (European Environment Agency), and in 2024, the atmospheric concentrations of carbon dioxide and methane reached record annual levels according to the Copernicus Climate Change Service. Events such as these have led to global large-scale financial pledges such as the Paris Agreement and the EU Green Deal. A commitment to sustainable finance forms a fundamental part of these pledges, as directing a large amount of global private capital towards more sustainable economic activities could have a significantly positive effect in tackling the climate crisis.

There has also been a significant increase in legislation pushing organisations to adopt more sustainable business practices (see section 3 for further information). With an increasing legislative focus on sustainability due diligence and reporting, businesses are becoming subject to disclosure requirements that could be used by potential investors when considering sustainable finance.

Over the last five years there has been a substantial increase in sustainable investment. According to a Morgan Stanley report, the interest of individual investors in sustainability was on the rise in 2024, with more than three-quarters stating that they are interested in investing in companies or funds that aim to achieve market-rate financial returns while also considering positive social and/or environmental impact.

Section 3 – Legal drivers in sustainable finance

The section below sets out the key legislation in the UK and the EU which impacts this area.

UK Climate Change Act 2008, as amended by the Climate Change Act 2008 (2050 Target Amendment) Order 2019 – this is a legal pledge by the UK to reach net-zero greenhouse gas emissions, including methane, by 2050. Whilst this is a legal requirement on the UK government, it will also trickle down to organisations through regulations, frameworks and laws that will assist in achieving this goal. This could also increase the likelihood of the government investing in green businesses.

UK Companies Act 2006 – requires companies to ‘promote the success of the company for the benefit of its members as a whole’ in a way that considers several factors, including environmental, social and governance matters, the interests of stakeholders and long-term value. The Act sets out an obligation to publish a strategic report for shareholders that includes the impact of the company’s operations on the environment.

UK Sustainability Disclosure Requirements (UK SDR) – will require companies and financial institutions to disclose their impacts using the UK-endorsed ISSB standards (which will be known as Sustainability Reporting Standards). The UK Government released an SDR: Implementation Update 2024 in May 2024 and in June 2025, it launched the first phase of consultations on the draft UK Sustainability Reporting Standards. If endorsed, the government aims to publish the final versions of the UK Sustainability Reporting Standards in autumn 2025.

The EU Corporate Sustainability Reporting Directive (CSRD) – the CSRD builds on the existing EU Non-Financial Reporting Directive (NFRD), requiring in-scope organisations to publish non-financial reporting information relating to sustainability matters on an annual basis. The obligation of sustainability reporting applies to large, medium-sized and small companies, in a phased approach. The first phase of reporting commenced in early 2025 in respect of the 2024 financial year. This was for large in-scope companies with more than 500 employees during the financial year.

In February 2025, an ‘Omnibus’ Directive was proposed by the European Commission, aiming to simplify EU rules on sustainability reporting and due diligence requirements. If adopted, the Directive would limit the obligation of sustainability reporting to large EU companies with 1000+ employees during the financial year, excluding small and medium-sized companies. Part of the Commission’s Omnibus package was the ‘Stop-the-Clock’ Directive, which was adopted in April 2025 and postpones the application of all reporting requirements in the CSRD for companies that are due to report in 2026 and 2027 (so-called wave 2 and 3 companies).

According to the European Financial Reporting Advisory Group (EFRAG), reporting must be made publicly available and adhere to the European Sustainability Reporting Standards (ESRS) which were adopted by the European Commission on 31 July 2023. In July 2025, EFRAG proposed a simplified set of the ESRS, reducing datapoints by 57%. The public consultation survey on the Exposure Drafts of the simplified ESRS was completed at the end of September 2025.

The CSRD will provide useful information to market actors in terms of identifying sustainable organisations that they could invest in as part of sustainable finance.

Sustainability-related Disclosures in the Financial Services Sector Regulations (known as the Sustainable Finance Disclosure Regulation, or SFDR) - imposes obligations on financial market participants, such as investors and asset managers, to disclose sustainability information regarding investments, including any adverse sustainability impacts that an investment decision may have.

The EU Taxonomy Regulation sets out the four overarching conditions that an economic activity must meet to qualify as environmentally sustainable. The Regulation establishes the basis for the EU Taxonomy, which is a green classification system serving as the cornerstone of the EU’s sustainable finance framework and an important market transparency tool (see section 4 for further information).

As part of the Omnibus Simplification Package (Omnibus I), the European Commission published a Draft Delegated Act amending the Taxonomy Disclosures, Climate and Environmental Delegated Acts, aiming to simplify both the content and presentation of information to be disclosed. The Delegated Act was adopted by the Commission in July 2025 and is currently awaiting approval from the European Parliament and the Council. The changes will apply once the scrutiny period is over. The simplification measures laid out in this Delegated Act will apply as of 1 January 2026 and will cover the 2025 financial year.

Section 4 – Key frameworks, standards, and guidelines for sustainable financ

There are several frameworks, standards and guidelines that have been developed to guide sustainable finance and green investments. Businesses should be aware of the significant developments in this area, the work that is being done to equip potential investors with information about sustainability, and the drive towards transparency on sustainability matters as a key factor in investment decisions. Key international ESG and sustainable finance initiatives and principles that are relevant to financial institutions include those set out below.

4.1. EU Sustainable Finance Framework

In 2018, the European Commission laid out the EU Sustainable Finance Action Plan (SFAP) following the 2015 Paris Agreement. The plan had the objective of promoting sustainable investments across the EU economy and included ten key actions divided into three wider categories:

creating a clear and detailed EU Taxonomy;
creating an EU Green Bond Standard; and
fostering investment in sustainable projects.

The EU Taxonomy is a green classification system that provides both financial and non-financial organisations with clear definitions of what constitutes environmentally sustainable economic activities. This enables organisations to engage in more sustainable activities in a meaningful way, makes sustainable financial investments easier and avoids problematic practices such as greenwashing. As part of this framework, the Taxonomy Regulation entered into force on 12 July 2020.

On 13 June 2023, the European Commission published a sustainable finance package, with the stated aim of showing how the EU sustainable finance agenda can support companies and the financial sector by encouraging private funding of transition projects and technologies and facilitating financial flows to sustainable investments.

On 19 November 2024, a new regulation on ESG ratings was adopted to make rating activities in the EU more consistent, transparent and comparable to boost investors’ confidence in sustainable financial products.

4.2. European Green Deal Framework

The European Green Deal Framework is the EU’s attempt to transform its economy through a Just Transition, where the EU market is set to have no net emissions of greenhouse gases by 2050. As part of this deal, the EU unveiled the European Green Deal Investment plan which aims to move €1 trillion into sustainable investments over the course of the next decade.

There are several proposals and frameworks included that support sustainable finance, such as the European Commission Sustainable Finance Strategy, adopted in July 2021, which provides a series of measures to assist in guiding money towards financing the EU’s transition to a sustainable economy. Included in these measures is the European Green Bond Standard (EUGBS) which was published in November 2023. The EUGBS will assist in directing financial and capital flows into green investments.

4.3. Other frameworks and guidelines

Other significant frameworks and standards that deal with incorporating ESG factors and sustainability in investment decisions include those listed below.

The World Bank Global Program on Sustainability has the objective of helping countries to invest more in natural resources, and to factor sustainability into economic development. It does this through providing data on natural resources and is made up of three pillars:
- global data and analytics;
- country and regional-level support; and
- sustainable finance.
Pillar 3 (sustainable finance) is aided by developing data and tools to integrate environmental considerations into financial markets and investment decision-making.
The UN Principles for Responsible Investment (PRI) is a key tool for sustainable investment. It supports investors in incorporating ESG factors into their investment decisions. It has the aim of creating a more sustainable, ESG-friendly economy globally.
In 2019, the UK Government released a Green Finance Strategy, which has since been updated in 2023. The strategy provides a framework for making sure that market participants, such as investors and organisations, have the information they need to align with the UK’s position in the green finance market. This means it will encourage financial professionals and organisations to consider how to move to a more sustainable economy.
The EU International Platform on Sustainable Finance (IPSF) aims to support the mobilisation of private capital towards sustainable investments. Countries that sign up for the IPSF (of which there are currently 21, including the UK, the EU, Switzerland, Japan, Singapore and India) can share information between themselves to aid sustainable finance opportunities, and to help investors find sustainable investment opportunities.
The Equator Principles are a framework in which financial institutions can use to identify, assess and manage environmental and social risks when financing projects. The most recent iteration, the EP4, came into effect for all Equator Principles Financial Institutions on 1 October 2020.
The International Finance Corporation (IFC) has multiple frameworks including its Sustainability Framework and a Corporate Governance methodology to help IFC’s clients improve business performance, engage with people affected by IFC-financed projects, enhance transparency, protect the environment and achieve a greater development impact. The IFC’s Sustainability Framework is made up of a Sustainability Policy, Environmental & Social Performance Standards, and an Access to Information Policy, all of which guide the IFC’s commitment to sustainable development. The IFC’s Corporate Governance methodology provides an approach to evaluate and improve a company’s governance and disclosure frameworks.

Section 5 – Sustainable finance for organisations

Sustainable investment involves investors assessing the sustainability credentials of an organisation before deciding to invest in it.

How sustainable an organisation is can be difficult to measure given the lack of a universal set of standards. However, there are several useful standards and frameworks that organisations can use in their endeavour to become more sustainable, such as those listed below.

The Global Reporting Initiative (GRI) Standards provide best practice for organisations in reporting on sustainability issues such as environmental and human rights issues. The standards are available for free and are the most widely used standard for sustainability reporting.
The International Financing Reporting Standards (IFRS) Foundation provides several different reporting standards that organisations can use. The IFRS has established the Sustainability Accounting Standards Board (ISSB) to develop standards and requirements for disclosing sustainable finance information. ISSB published its inaugural Global Sustainability Disclosure Standards in June 2023.
The Carbon Disclosure Project provides different resources to organisations to aid them with environmental disclosure. One of the key tools is providing a score to organisations based on their environmental performance and disclosures. Not only do these assist and encourage organisations to improve their sustainability and reporting, but the score can be used by potential investors to inform them about the sustainability of an organisation.
After completing an assessment and receiving an affirmative endorsement decision on the ISSB Standards (IFRS S1 and IFRS S2), the UK Sustainability Reporting Standards will be published in 2025. These standards will be based on IFRS S1 and IFRS S2 and will be part of a broader Sustainability Disclosure Reporting framework (as referenced in Section 3) led by HM Treasury. This framework aims to promote consistent disclosures.
The Taskforce on Inequality and Social-related Financial Disclosures (TISFD) was launched in September 2024 to formulate a global framework with disclosure recommendations to help companies and financial institutions identify, assess and report the inequality and social-related impacts, dependencies, risks and opportunities.

Section 6 – Issues for in-house counsel to consider

There are different ways in which in-house counsel can assist with sustainable finance, whether in terms of helping an organisation to become more appealing to investors from a sustainability perspective, or to assist investors in identifying sustainable investment opportunities.

Some of the issues legal counsel can consider include those listed below.

For potential investors:

Navigating investment decisions to identify genuinely sustainable opportunities, including making use of the frameworks referred to in section 4 above.
Reviewing current policies around investment to introduce sustainability commitments.
Reviewing the legal landscape to ensure that investment decisions and strategies align with existing and upcoming regulatory requirements and that investors comply with their reporting obligations.
Developing screening criteria for investments – this is a way of screening potential investments to rule out companies for investment where they are not truly sustainable or where they have poor ESG scores. Screening can be as narrow as avoiding specific companies, to as broad as avoiding entire sectors, and can be done using some of the frameworks and standards mentioned in this resource to test the sustainability of an investment.

For organisations:

Helping organisations to avoid greenwashing (for further information see How-to guide: How to understand and avoid the risks of greenwashing).
Assisting with utilising sustainability standards and frameworks and embedding sustainability into corporate governance and business operations.
Advising on the ESG risks and opportunities for the organisation and how to manage them.
Ensuring compliance with disclosure and reporting requirements.
Keeping up to date with legal and regulatory developments relating to ESG and sustainability.
Advising the board on sustainability reporting obligations.
Guiding the organisation to put in place effective human rights and environmental due diligence processes.
Providing input to policies and codes of conduct that include sustainability commitments and considerations and ensuring that these policies are robust and meet stakeholder expectations.
Updating contracts to include human rights and environmental considerations for suppliers and business partners.
Understanding emerging ESG litigation risks and regulatory enforcement actions.
Regularly reviewing policies to ensure they align with legislative changes.
Continuing to be part of the ongoing dialogue and day-to-day activities and decisions as organisations address ESG and sustainability.
Promoting collaboration among ESG lawyers and the rest of the legal department and beyond.
Leading the organisation beyond compliance.

^* This practical resource was produced in partnership with Ardea International.

Additional resources

European Commission – Overview of sustainable finance
Financial Conduct Authority - Climate-related reporting requirements
Financial Conduct Authority – Climate change and sustainable finance
Harvard – What Is Sustainable Finance and Why Is It Important?
MSCI – ESG Investment Finds its Footing
Climate Change Committee – A legal duty to act
MSCI – Sustainable Finance
Principles for Responsible Investment – Explaining the EU action plan for Financing Sustainable Growth
Financial Times – ‘Legal eye for detail will help battle sustainable finance “greenwash”’

How-to guide: An introduction to sustainable finance

Introduction

Section 1 – The meaning of sustainable finance

1.1 Sustainable finance and ESG

Section 2 – The importance of sustainable finance

Section 3 – Legal drivers in sustainable finance

Section 4 – Key frameworks, standards, and guidelines for sustainable financ

4.1. EU Sustainable Finance Framework

4.2. European Green Deal Framework

4.3. Other frameworks and guidelines

Section 5 – Sustainable finance for organisations

Section 6 – Issues for in-house counsel to consider

Additional resources

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Sustainability

ESG

United Kingdom

European Union

Environment & Climate Change

Company & Commercial