Dennis Farr
Senior Manager, Financial Services
Sustainable Finance
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Sustainable Finance
The financial sector and sustainable finance play a crucial role in the transition to a fair and climate-friendly future. However, in order to achieve the European Union's goal of climate neutrality, substantial increases in investment to transform the economy, more transparency and the redirection of financial flows towards sustainable business models are required. To promote this development, the European Commission introduced the European Green Deal as a comprehensive, cross-sector strategy. As part of this, the European Union has since adopted a comprehensive package of legislation, including the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), and the Corporate Sustainability Reporting Directive (CSRD). Many companies in Germany are already affected by these regulations and further requirements – for example in risk management, with further requirements coming into force in the near future.
Sustainable finance is characterised by the comprehensive and systematic incorporation of sustainability criteria into all financial decisions and activities. To ensure transparent and comprehensive sustainability reporting for companies, the EU has adopted the CSRD. Under this directive, companies are required to disclose detailed information about their material topics in the areas of environmental, social, and governance (ESG) in accordance with “Financial Materiality” and “Impact Materiality”. This includes not only presenting their own sustainability goals and strategies and appropriate measures, but also the disclosure of relevant parameters. The CSRD promotes consistent reporting, enabling stakeholders such as investors to better assess and compare the sustainability performance of companies. ESG reporting thus significantly influences companies' access to capital.
The European Sustainability Reporting Standards (ESRS), developed by the European Financial Reporting Advisory Group (EFRAG), constitute the reporting standard that companies that are required to prepare a sustainability report according to CSRD must use when disclosing information. The ESRS include overarching requirements and disclosure obligations as well as further topical and cross‑sector standards covering environmental, social and governance matters. The "voluntary sustainability reporting standard for small and medium‑sized undertakings" (VSME) is a voluntary reporting standard published by EFRAG for companies that do not (any longer) fall directly under the CSRD reporting obligation. It provides these companies with a uniform framework for voluntary reporting and enables them to meet the data requirements of larger companies that request ESG information from their counterparties.
With the EU Taxonomy, the European Union adopted a regulation in 2020 which uses six environmental goals and various catalogues of criteria to define the conditions under which economic activities can be classified as sustainable. The six environmental objectives are:
The regulation makes it easier for companies to classify their investments in projects or activities that meet the criteria of the Taxonomy and are therefore considered sustainable. The EU Taxonomy helps companies to promote sustainable investments, facilitate access to capital, and reduce the risk associated with regulatory requirements. Alignment with the criteria of the Taxonomy is thus becoming an important part of corporate and sustainability strategy and financing decisions.
The SFDR obliges financial market participants and financial advisers to be transparent about how sustainability is integrated into their processes and products. The Delegated Regulation (EU) 2022/1288 provides granular templates for pre contractual disclosures and for periodic reports for Article 8 and Article 9 products. Companies must also state on their website whether they consider the principal adverse impacts of their investment decisions on sustainability factors (Principal Adverse Impact Statement) and publish the related indicators (e.g. CO₂ footprint). At product level, they are required to explain how sustainability risks are taken into account, in particular for products with environmental or social characteristics and for sustainable investments. Additionally, companies must report regularly on the achievement of sustainability criteria.
ESG criteria also play an important role in risk management, as ESG risks can have a material impact on a company's financial and economic performance. Climate change and its consequences will become increasingly important for a growing number of companies, as they must integrate the potential impacts of physical risks such as droughts and floods and of transition risks arising, for example, from political or technological change, on their business models into their risk management. Sustainability risks therefore constitute core aspects that must be consistently considered in business strategy, risk assessment, control processes, and capital and liquidity planning and risk-bearing capacity. In addition, the MaRisk and the EBA guidelines on the management of ESG risks (EBA/GL/2025/01) require a proportionate embedding of ESG in risk management and specify supervisory expectations, in particular with regard to data management, reporting, governance, transition planning and scenario analysis.
We provide tailored audit and advisory solutions across the entire spectrum of sustainable finance to support your company on its path to full integration of sustainability aspects into its corporate strategy and to ensure compliant sustainability reporting. We are happy to assist you with existing or future sustainability disclosure requirements. Our experts also advise on the EU Taxonomy and ESG risk management. In addition to individual analyses, process and project management, we offer workshops on regulatory requirements and reporting, raise awareness of sustainability as an important future topic within the financial system among your stakeholders and keep track of regulatory developments, current challenges and best practices for you.
Dennis Farr
