3rd Edition / March 2020

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#3 Sustainable Finance

Sustainability is an ample and multifaceted term which broadly denotes the existing interdependencies between economic development, social considerations, and environmental protection. The Anthropocene, “our” age, characterised by the pervasive human influence on Planet Earth, has found in ‘sustainability’ the keyword to illustrate the need to ensure long-lasting prosperity. “Finance”, far from immune to “sustainability’s” relentless pull, is seen, not only by activists, but increasingly by companies, institutional investors, and regulators (including central bankers) as instrumental to achieve it. And yet… “sustainable finance” has not, in turn, been immune to accusations of overreach, wishful thinking, or lack of substance.

The challenge for BrieFin’s third number, therefore, is to illustrate “sustainability” and “finance” particular relationship offering viewpoints that are varied and diverse, but, above all, substantial. Following the dialogic and multi-stakeholder spirit that characterises the European Banking Institute (EBI), this edition continues to propose the points of view of different actors, in order to foster a genuine debate that considers sustainable finance from different angles: academics, regulators, industry participants, practitioners, and young researchers, all contribute to the unfolding of a concept that still needs to be conceptually and pragmatically developed, and do so by fleshing out specific questions that are crucial to better understand the ties between sustainability and finance. They all agree on one thing: sustainability is here to stay and is not a mere buzzword used to apply cosmetic changes to the regulation of the financial system. On the contrary, the pieces reflect the different ways through which sustainability has penetrated the EU’s financial, economic and, most importantly, social domains.

Although the development of common criteria, taxonomies, and further technical tools that help distinguish between what can be deemed as sustainable and what cannot is still in its infancy, the contributors show how a wide set of steps has already been taken in the right direction, with a view to fostering a more sustainable economy that focuses not only on the most pressing needs, but on the well-being of future generations too. We hope this fascinating debate sparks the EBI’s community curiosity and interest!


The Comprehensive View

Climate litigation as financial risk

Javier Solana, Lecturer in Commercial Law, University of Glasgow

In his landmark speech at Lloyd’s of London, Mark Carney, then Governor of the Bank of England, articulated how the current climate emergency could pose a risk to financial stability. He described three risks: 1) “physical risks” deriving from climate-and weather-related events, 2) “transition risks”, which could result from the process of adjustment towards a lower-carbon economy, and 3) “liability risks”, which could arise ‘if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible’. This framework has informed many of the regulatory and industry initiatives aiming at managing climate-related risks, although it is now common to include liability risks as an example of physical and transition risks.[1]

The financial risk associated with climate litigation, however, is much more complex than currently envisioned by financial regulators and supervisors. In order to better understand this complexity, it is useful to think about two aspects: the types of costs and the types of effects that can arise from climate litigation. Let me describe each of these aspects in turn.

Climate litigation can expose companies to different types of costs.[2] First, and perhaps most evidently, if the court or arbitral tribunal issue a decision against a given entity requiring it to pay compensation for any damages caused to the plaintiff,[3] or if an administrative authority imposes a fine on the entity for failure to comply with relevant regulatory provisions,[4] the entity will face the cost of paying the said damages or fines.

Second, climate litigation will require the defendant to pay for the cost of its legal defence. In fact, depending on the nature and the outcome of the proceedings, the defendant may also be required to pay for the costs of the proceeding, including the fees of the lawyer’s representing the opposing party.

Third, an increase in the volume of cases that a given entity faces might lead to an increase of premia in liability insurance policies, especially if the outcomes of the cases are unfavourable to the relevant entity. Several voices, including the United Nations Environment Programme Finance Initiative (UNEP FI) have already warned about the potential “un-insurability” of many risks if the current climate crisis continues to aggravate. Depending on the terms of the policies, however, increases in insurance premia may not come into force until several months or years after a relevant climate case.[5]

Fourth, climate litigation can increase the cost of capital. For example, in sustainability-linked financial products, contracts may include provisions that trigger interest rate increases when the borrower engages in activities that have a negative impact on the environment, or when the environmental reputation of the borrower deteriorates. Sustainability linked loans are a prominent example.[6] But climate litigation can also increase the cost of capital in financial products that are not linked to sustainability performance. For example, if the costs identified in the previous paragraphs are so significant as to affect an entity’s creditworthiness, climate litigation could affect the entity’s credit ratings, which might trigger similar interest rate increases as those described for sustainability linked financial products. A downgrade of the entity’s credit rating could also pose additional liquidity pressure if it triggers collateral calls under certain financial products such as repos or derivatives (see Brunnermeier and Pedersen 2009).

Lastly, climate litigation can undermine an entity’s market valuation. For example, the price of an entity’s shares may drop if investors expect an increase in climate litigation against the entity and try to anticipate potential costs as those described above by selling their shares in the entity. In addition to the costs identified above, investors may also perceive that climate cases could undermine the entity’s reputation and may try to anticipate potential reputational losses by selling their shares (see Armour, Mayer, and Polo 2017).

The costs described above can stem from different effects of climate litigation. Some of these costs will be directly related to a specific climate case against a given entity: most evidently, once the lawsuit is filed, the costs of hiring lawyers to represent and defend the entity in the proceedings, and, potentially, the cost of any damages or fines determined by a court, an arbitral tribunal or an administrative authority, such as a financial supervisor.[7] Although we don’t have detailed data about these costs, there has been a growing number of climate cases in recent years (see Setzer and Byrnes 2019), which would suggest that these direct costs have also been on the rise. An increase of these direct costs could also prompt the entity’s insurance provider to increase the premium in a liability insurance policy. But a climate case might also impose less evident direct costs on the defendant. For example, the filing of a suit or the initiation of a supervisory investigation might expose a potential connection between the entity’s activities and the aggravation of the climate emergency, which might negatively affect the entity’s reputation. In fact, the mere possibility of a suit being filed, or an investigation being initiated, could lead the public to precipitated conclusions about the entity’s contribution to the climate emergency that could undermine its reputation. These reputational losses might manifest themselves in drops of share prices,[8] as described above.

Climate litigation against a third party can also impose indirect costs on a given entity. For example, an unfavourable decision against a client or supplier of the given entity might have a negative effect on the formers’ reputation; but the latter’s reputation may also be negatively affected if the public associates the activities of the given entity with those of its clients and/or suppliers. Financiers can be particularly vulnerable to this reputational effect.[9] Moreover, an unfavourable decision against an entity operating in the same industry might prompt investors to revaluate their expectations of other entities in that industry and their risk of facing similar unfavourable decisions, leading investors to reduce their investments in this sector. Changes in the public opinion and investors’ expectations may happen immediately after a case is filed or a decision issued, or may take several months (or even years), thereby delaying the crystallisation of these indirect costs.

BrieFin #3 - Table 1 - Costs of climate litigation in financial markets

Attempts to quantify these costs will face several challenges. First, an estimation of the amount of damages or fines that an entity might have to pay will depend on three variables that are very difficult to measure: i) the probability of a case being filed or an investigation being initiated, ii) the probability that a court, arbitral tribunal or administrative authority will issue a decision against the relevant entity, and iii) the amount of damages or fines that a court, arbitral tribunal or administrative authority may impose on a given entity. An accurate estimation of all these variables would require an in-depth legal analysis to determine the type of claim that plaintiffs could bring against a given entity, as well as the legal standing in each of those claims, i.e. who can bring a case before the court or arbitral tribunal, or initiate an administrative investigation, and on what grounds. This analysis will have to be carried out in all the relevant jurisdictions where a given entity operates: although the laws of two jurisdictions may include rules that are very similar in principle (e.g. a regulatory rule imposing a fine for failure to disclose environmental information to investors), the courts, arbitral tribunals and administrative authorities of different jurisdictions may approach the application of that rule very differently, for example by relying on different standards of compliance (what counts as sufficient disclosure?) or by interpreting key concepts (e.g. “environmental information”) differently. These differences are rooted in different legal cultures and traditions, which, again, may be difficult to measure. For entities with a wide international presence, the exercise can become very complex and costly.

In addition to the challenges of a multi-jurisdictional legal analysis and the quantification of qualitative data, the first variable enumerated above (the probability of a case being filed or an investigation being initiated) faces an additional challenge. Even if we were able to narrow down the number of potential plaintiffs as a result of the legal analysis described in the previous paragraph, a plaintiff’s decision to file a case will depend on a myriad of elements that can be very difficult to measure, e.g. its ability to fund the litigation[10] or its subjective assessment of the suitability of initiating litigation.[11]

Measuring the indirect effects of climate litigation will also be challenging. If the trend of growing climate litigation continues, investors might revisit their expectations about climate litigation as a financial risk, especially if the continuation of that trend is underpinned by decisions imposing considerable direct costs on companies. A sudden revision of investors’ expectations in relation to climate litigation across a given industry would also have an indirect effect on those institutions that have not been sued. Anticipating when and how these indirect costs would arise will be difficult (Will insurance premia rise? If market valuations change, will they do so through credit ratings, ESG ratings or share prices? Or perhaps through all?), let alone estimating the amount of these costs in advance. To complicate matters further, indirect effects could also spur an increase in direct costs. For example, a decision requiring an entity to pay damages or imposing a fine might set a precedent that could incentivise other plaintiffs to file suits against other entities in the sector.

Lastly, we have advanced in our understanding of the types of claims that might underpin climate litigation cases and in identifying litigation trends;[12] but analyses of the economic costs of climate litigation are scarce. Given that the fossil fuel industry has concentrated the highest volume of climate litigation, we can expect more elaborate analyses to develop in this industry first. Although many of the costs identified above are likely to arise in different industries, climate litigation may give rise to specific costs in specific industries. Most evidently, some claims may be exclusive to specific industries.[13] Moreover, climate litigation might give rise to different effects in different industries. For example, carbon majors may be more exposed to direct effects that predate the actual filing of a suit, and financial institutions may be more exposed to indirect effects resulting from a client facing a climate lawsuit. Different industries will therefore require different approaches to the analysis of the costs of climate litigation.

The central role that finance plays in the development of projects across different sectors makes the financial services industry particularly interesting.[14] Financial institutions are beginning to appreciate the financial risk of the current climate emergency. So are their supervisors, who are slowly incorporating these climate-related financial risks into their supervisory frameworks.[15] Their understanding of “liability risks”, however, epitomised by Mr Carney’s remarks in September 2015, is very narrow: it only focuses on direct costs associated with an unfavourable decision. As evidenced by the categorisation of direct and indirect costs described above, the total costs of climate litigation can be far greater.

Such a narrow conception understates the complexity of climate litigation and threatens to underestimate the financial risks of the current climate emergency. A first step to acknowledge the complexity of climate litigation would be to discard the term “liability risk”. This term only captures one of several costs potentially arising from climate litigation. The term “climate litigation risk” seems to better capture the complexity of the phenomenon and the diversity of the financial risk associated with a potential climate suit. In the future, a complete analysis of climate-related financial risks will require financial institutions and supervisors to understand the complex effects of climate litigation. They should begin to work on addressing the methodological challenges identified above to update their current risk assessment and supervisory frameworks as early as possible.

[1] See e.g. Network for Greening the Financial System (NGFS 2019), p. 12.

[2] The following classification focuses on companies. Regulators and supervisory agencies might face different costs resulting from very specific claims, e.g. violation of fundamental rights, lack of authority or breach of procedural rules that might thwart the validity of a given policy measure. In relation to finance, see e.g. Solana (2019). For example, in addition to the costs of the proceedings, if a policy measure is invalidated, these authorities would have to face the cost of unwinding the original measure and designing and implementing a new one. Unwinding the original measures might also have an indirect effect on the financial services industry, or the real economy more generally, if a delayed implementation undermines the efficacy of the measure.

[3] For example, a financial services firm may need to pay damages in claims relating to false advertising or nuisance. See Solana (2019).

[4] For example, in 2018, Chinese financial supervisory authorities imposed a fine on Ping An Bank for failing to conduct pre-loan investigations in relation to its customers’ compliance with environmental standards.

[5] Products of non-life insurance companies are typically on a one-year horizon, which would allow the insurance sector to adapt to the new circumstances on a relatively short notice. See NGFS, p. 25.

[6] Sustainability linked loans (SLLs) aim to align the terms of the loan, including the interest rate, to the borrower’s performance against a set of predetermined sustainability performance targets. The Sustainability Linked Loan Principles (2019) identify ten common categories of sustainability performance targets. One of them refers to “Global ESG assessment”, which includes ‘[i]mprovements in the borrower’s ESG rating and/or achievement of a recognised ESG certification’, p. 4. Climate litigation can deteriorate an entity’s environmental reputation, which can, in turn, affect its ESG rating. See Linklaters (2019).

[7] The parties might reach an agreement to settle the dispute before a decision is issued, the given entity facing a similar payment (possibly lower, given the nature of a settlement) as they will have faced had a decision been issued.

[8] Shareholder litigation has been found to drive share prices down as early as one month before the filing. See Bauer and Braun (2010).

[9] Institutions financing controversial projects deemed to aggravate the current climate emergency have faced considerable criticism and been the target of growing social movements.

[10] In the case of an administrative investigation, e.g. in the context of financial supervision, the same problem arises when attempting to estimate the administrative authority’s capacity to launch an investigation given its limited financial and human resources.

[11] A plaintiff’s decision to initiate litigation may be motivated by factors beyond the probability of the case succeeding (e.g. to build up social and political support for its cause, placing greater emphasis on the media coverage of the filing than on the actual outcome of the case).

[12] See Setzer and Byrnes (2019) and Solana (2019).

[13] As in the case of Ping An Bank.

[14] Climate litigation in financial markets is also on the rise: in 2018 there were more cases filed than in any previous year. See Solana (2019).

[15] The Dutch central bank, for example, has already began incorporating these risks into its stress test models. See DNB (2017)

The regulators' view

Sustainable Finance for regulators: Traps and the known unknowns

Rui Peres Jorge, Director Strategic Analysis and Communications Office at the Portuguese Securities Market Commission (CMVM)

The collective effort to improve the functioning of the world economy and its financial system is leading us to significant developments in considering environmental, social and governance (ESG) impacts of financial choices.

This rise of Sustainable Finance to the forefront of policy discussions stands as a unique opportunity to develop better markets and economies. Banking scandals and bankruptcies during the global financial crisis demonstrated the high price to be paid due to poor governance; inequality in income and labour conditions is contributing to political extremism and creating incentives for higher indebtedness by poorer households and countries; and, while global warming is determining harsh sacrifices for populations in significant parts of the world, and imposing trillions of euros in economic losses. This context is providing the necessary awareness for environment, social and governance concerns to take the front stage also among issuers, asset managers and investors.

Although still representing a rather small part of the world’s financial markets, the rise in ESG related investments has been impressive. Currently, ESG assets under management range between 2,7 trillion and 28 trillion euros, depending on the adopted methodologies, according to the IMF. Total assets under management by the 2500 signatories of the Principles of Responsible Investment (PRI), an UN-supported association of investors, has reached around 82 trillion euros this year, tripling since 2013. And green bond issuance, both of public and corporate entities, will likely reach 225 billion euros in 2019, increasing from under 10 billion euros in 2013.

Regulators and governments have played their part in this story. Recent research by PRI’s team sheds some light on policy developments[1]:

Since 2000, PRI identified “over 730 hard and soft-law policy revisions, across some 500 policy instruments, that support, encourage or require investors to consider long-term value drivers, including ESG factors”. Of these, 80, more than 10%, occurred in the first half of this year;

More countries are moving from sporadic adoption of initiatives to comprehensive national strategies supporting sustainable finance;

Regulation is gradually evolving from “comply or explain” to “comply and explain”, from voluntary to mandatory, and from high-level principles to regulatory implementation.

Finally, policy makers and investors are increasingly looking beyond financial risks and returns, considering in addition the economic and social outcomes of financial choices when financing the real economy.

While adopting a cautious view on all new regulation, the CMVM has been an active participant in the international fora and has engaged frequently with national market stakeholders. As we stated in a consultation paper put forward in February [2]: “The CMVM identifies [the prominence of] Sustainable Finance (…) as an unprecedented opportunity to incorporate elements of ethics, social and corporate responsibility into financial models, as well as an opportunity to attract new issuers, financial intermediaries and investors”, but also that “in view of the rapid changes and new features that Sustainability is introducing in the market, business models and the financial system, the CMVM also acknowledges that this transformation, despite being welcome, includes emerging new risks for investors and the market”.

The results of this public consultation were just published[3]. The major risks and difficulties identified by market participants related to the development of Sustainable Finance were:

Poor data quality and lack measurement standards;

Reporting and compliance costs of the new rules;

Greenwashing when developing and distributing products and strategies;

Development of proper risk models, namely for transitional and physical risks of climate change;

Implication of the new rules in daily operations;

How to move from short-term focus in management and investment strategies to longer-term objectives and practices;

In terms of the regulator’s role, market participants expectations are:

Inform and issue recommendations to investors, market entities and the society at large on the best ways to integrate and comply with new regulation and supervision rules;

Assure permanent communication with relevant stakeholders to explain the new framework and, when possible, develop and tailor solutions in cooperation with market participants;

Clarify and harmonize the non-financial disclosure rules, namely regarding what is already being reported;

Prevent greenwashing.

This is a prescient evaluation by the Portuguese corporate and financial system, especially if one considers that Sustainable Finance is still largely unknown to most investors and SMEs. The diagnosis is in fact very much aligned with the concerns and challenges pointed out by a recent consultation led by the FCA on climate change and green finance[4] in the United Kingdom.

We should take some comfort in these results. The alignment in the conclusions between two very different markets and regulators signals we have a reasonable consensus regarding the ‘known unknows’ we are dealing with in this new system under development. This means we can devise better policies and priorities, considering market needs.

In that regard, regulators face four practical challenges on the coming years:

1. Definition of scope, measurement and flexibility.

Regulators and market participants need to agree on a common language regarding classification of investments and measurement of impact. Europe is about to take a significant step in the right direction by approving the EU taxonomy for sustainable activities, but even so, we should not lose sight of five relevant insufficiencies:

i. Social and corporate governance principles are lagging relative to the environmental dimension of ESG. Given the urgency, the focus on climate is only natural, but in the medium term three “ESG” principles should be developed in tandem;

ii. Lack of accessible and reliable data regarding inputs, outputs and impacts of Sustainable Finance products and strategies. Although we observe a growing consensus on the need to act on climate change, we still have a lot to do to reach a consensus regarding their impacts and implications on global warming, on market risks and returns, and on asset valuation in balance sheets of financial institutions.

iii. Lack of standards for reporting and auditing of sustainable finance indicators. This implies the development of common rules for disclosure of all material information in different time horizons, assuring comparability, namely by harmonization of indicators, and tested ESG-rating methodologies;

iv. Need for sizeable investments in people, training and technology;

v. Lack of clarity on the future of conversion methodologies between geographies, and rules to deal with third-country rules.

2. Simple, clear and proportional regulation.

The multiple initiatives undertaken by the European Commission and ESMA, some already approved by the Council of the EU, but also central banks, and IOSCO, show how seriously regulators are taking the sustainable investment challenges. The next years will therefore be marked by relevant adjustments in some of the most important pieces of market regulation, from prospectus and disclosure of non-financial information, to investor protection measures and de creation of new benchmarks, including changes in MiFID, UCITS and AIFMD, and the revisiting of the concepts of fiduciary duties. As far as possible, regulators need to align solutions to avoid market fragmentation. Additionally, these rules ought to be made as simple as possible and, while considering proportionally concerns, they will likely need to be made mandatory.

3. Harmonization of supervision

It is essential to assure convergent supervision practices between jurisdictions with different environmental, social and governance contexts. This is even harder when the concepts, practices, outputs and impacts are better known to scientists than to financiers and economists.

4. Finally, regulators need to avoid traps of uncertainty, expectations and greenwashing.

The development of this new dimension in market behaviour demands special care from all parties to avoid common dangers:

i. Uncertainty trap. Regulators need to reduce market uncertainty and informational noise to promote the adoption of new practices and to facilitate the right price discovery. A clear set of relevant information for each sector should be defined in collaboration with experts, investors and the industry; disclosure must be mandatory, harmonized and simple; and all rules, objectives, risks, as well as the behaviour expected of corporates and investors, should be clearly communicated, while carefully evaluating the reactions of private market participants going forward.

ii. Expectations trap. The financial community should avoid unrealistic expectations regarding the results and impacts of Sustainable Finance. In particular, it should be made clear that the incremental approach that is currently being pursued will not be sufficient to limit the global warming to the current objectives; and also that sustainable strategies or products might imply trade-offs that require full transparency as not all strategies will mean a better financial pay-off, and surely not in the short-term.

iii. Greenwashing trap. The high degree of uncertainty regarding indicators, metrics, and their validation by internal and external auditors and ESG-rating institutions, is a significant risk for regulators, that might end up being asked to offer credibility stamps to sustainable investment products and strategies. This means a credible system of rating ought to be developed, assuring a properly regulated rating industry.

[1] “Taking Stock: Sustainable Finance Policy Engagement and Policy Influence”, Principles for Responsible Investment Association, September 2019 https://www.unpri.org/pri/pri-blog/pris-first-sustainable-finance-policy-conference-heres-what-we-discussed

[2] Sustainable Finance: Reflection and Consultation Document”, Comissão do Mercado de Valores Mobiliários, February 2019 https://www.cmvm.pt/en/Legislacao/ConsultasPublicas/CMVM/Pages/20190228.aspx?v=

[3] “Sustainable Finance: Challenges and Priorities for both the market and CMVM”, Comissão do Mercado de Valores Mobiliários, November 2019 https://www.cmvm.pt/en/Comunicados/Comunicados/Pages/20191112mc.aspx

[4] “Climate Change and Green Finance: summary of responses and next steps”, Financial Conduct Authority, October 2019. https://www.fca.org.uk/publications/feedback-statements/fs19-6-climate-change-and-green-finance

The industry's view

Sustainable Finance: The savings banks’ perspective

Chris De Noose, Managing Director, European Savings and Retail Banking Group (ESBG)

At the latest with the adoption of the UN 2030 Agenda for Sustainable Development and the Paris Climate Agreement, sustainable finance has become a crucial topic within the banking sector and policy circles. For good reasons. There is no doubt that the world needs to become more sustainable than it is nowadays. European savings and retail banks fully agree. There is a need to address growing inequality, unequal economic inclusion, and insufficient investments in all kinds of infrastructure, not to mention the significant loss of biodiversity and increase in air pollution.

In Europe, the European Commission stepped up the tempo in 2018 by presenting an Action Plan on financing sustainable growth. Several legislative initiatives were launched (some of them have already been passed successfully), and many more will follow. In December 2019, the new Commission President, Ms von der Leyen, presented a “European Green Deal”, which aims to support a just and inclusive transition of Europe to a climate-neutral continent by 2050. The deal lists numerous actions (e.g. in the areas of transport, energy, corporate reporting) to follow up on in the coming months and years to “improve people’s well-being and secure a healthy planet for generations to come”. All the things that stand behind the European Green Deal are key elements of the Commission’s new growth strategy that shall help cut emissions while creating jobs.

The European Savings and Retail Banking Group (ESBG)[1] and its members have very carefully analysed the initiatives which have already been put forward. During this process, one detail became apparent: so far, the focus has been put, above all, on the environmental aspects of sustainable finance. As indicated above, this certainly is of fundamental importance, and ESBG shares the point of view that actions are needed sooner rather than later to, for instance, mitigate climate change.

However, as the European Commission itself also pointed out in its action plan, the concept of sustainability rests on environmental and social considerations alike. In our view, the European institutions should make sure that regulation around sustainability always takes into account a policy measure’s social impact. Avoiding side effects that might restrict, for example, access to financial services, employment opportunities, or cause unwanted social effects is important. Sustainability must be holistic and should integrate both social and environmental objectives. Moreover, it should incorporate good governance principles and a commitment for all financial actors to be good corporate citizens.

Going back to the main point of the last paragraph: why is the social dimension of sustainable finance such an important aspect to savings and retail banks in Europe? The answer to this question is fairly straight-forward: because it has been a lived and established practice for more than 200 years.

Savings and retail banks are built on traditional, locally-focussed business models that are centred on being responsible and conscious of the needs of society. They play a crucial role in supporting inclusive and sustainable societies, as they provide fundamental banking services, such as bank accounts, loans, financial advice and education to their customers – primarily private households, SMEs and local/regional communities. Serving all kinds of customers, savings and retail banks contribute to strengthening social cohesion and ensure that no one is excluded from basic access to financial services. Furthermore, savings and retail banks have a mandate that goes beyond short-termism and mere profit maximisations. They endeavour to expand their positive impact for all stakeholders with a long-term horizon.

Apart from the social dimension of sustainable finance, a second observation of ESBG in the debate concerns the need for a smart approach regarding a necessary transitional period to a more sustainable economy. We trust that both international and EU decision-makers know that some changes, such as updating IT infrastructure, recalibrating risk assessments and reviewing financial advice, take time and additional resources to implement. Furthermore, in some respect, a lack of appropriate data might hamper the swift application of new processes. An adequate transition period as well as proportionate and suitable requirements and expectations (in particular concerning disclosure requirements and data availability in relation to SMEs) will be fundamental to cater for the specificities of the European savings and retail banking sector.

To be clear: ESBG and its members are fully committed to a successful transition to a sustainable economy. And we believe that this transition can successfully happen if everyone contributes and works together. We are aware that shifting to a more sustainable economy will imply important changes to key sectors such as housing, transport and manufacturing. There are industries that will take longer to decarbonise, where the decarbonisation process is very technology and innovation intense, requiring considerable resources, but which strongly support the economy such as iron, steel, cement, glass, agrochemicals and petrochemicals. Steering finance towards the sustainable development of these is crucial for increased sustainability in society. ESBG members, with their long-term oriented business model, have been and will be in the first row to provide the financial means to their customers – in particular smaller and larger corporates as well as households – to go for sustainable projects.

As a third and final point, allow me to share some thoughts on the regulatory initiatives, and provide some food for thought for policy-makers, supervisors, researchers, analysts and other stakeholders.

A couple of major legislative initiatives of the package of measures on sustainable finance that the Commission announced have already been successfully concluded: a Regulation on disclosures relating to sustainable investments and sustainability risks and a Regulation on low-carbon benchmarks. In respect of the latter, ESBG is convinced that carbon benchmarks are a useful addition to traditional benchmarks. On the disclosures dossier, we highlighted some possible difficulties for banks and smaller companies to fulfil overwhelming data gathering necessities (not only from a resources point of view, but also – or even more so – from a data availability point of view). It remains to be seen how this will play out in practice.

A third legislative proposal, perhaps the most fundamental one, may have so far been the most difficult one to agree upon: the so-called “taxonomy” (or proposal for a Regulation on the establishment of a framework to facilitate sustainable investment[2]). This legislative piece will provide a great number of much-needed definitions for a common understanding on sustainable finance, and set out the criteria for determining the sustainability of an economic activity. In an ideal scenario, this legislative proposal should have been the first one agreed upon, in our opinion, as it aims to provide a solid basis for many other sustainable finance-related dossiers. Defining a workable framework is absolutely necessary to ensure a homogeneous inclusion of sustainability considerations throughout the EU. In ESBG’s point of view, it was also important that the decision-makers agree on a taxonomy that is dynamic, avoiding the risk of a static vision where funding the transition to increased sustainability is discouraged. Hence, ESBG very much welcomes that the taxonomy was extended to activities enabling and supporting the transition despite the fact that the agreement provides for stricter conditions for their acceptance. We also appreciate that certain definitions and disclosure requirements between the taxonomy and the disclosure Regulation were aligned. An aspect that ESBG is more sceptical about in the finalised taxonomy dossier is the extension of its scope to all financial products. In our assessment, the taxonomy should, ideally, focus on products marked as sustainable, in order not to create any additional and avoidable regulatory burden. Furthermore, extending the scope of the taxonomy to cover economic activities that significantly harm environmental sustainability – to be reviewed by 2021 –is not currently deemed appropriate or necessary by ESBG.

These three legislative pieces are obviously just part of the story. Many more initiatives have been launched and many more ideas need to be thoroughly discussed. For instance:

What does the risk side of green lending look like? Are green loans less likely to become non-performing so that a “green supporting factor”, as called for by several stakeholders, would be justified?

Should central banks in their bond purchasing programmes make sustainability considerations more popular?

How can we best develop synergies between development banks and credit institutions, including in the field of green bonds and green loans?

How can we ensure that the work that is being carried out at international level (e.g. by the Network on Greening the Financial System – NGFS) is compatible with the EU’s regulatory developments?

Furthermore, ESBG has also started to actively engage in several other sustainability discussions, such as on how ESG risks could be included in the supervisory review and evaluation process, which competent authorities are carrying out on a regular basis, as well as on how an EU Ecolabel for retail financial products, which most of us know from washing machines and light bulbs for example, could be designed.

In conclusion, a common effort by all of us will be needed in order to make the world more sustainable than it is today. With respect to the financial services sector, the industry, regulators, supervisors and academia need to work hand in hand for a successful delivery of results. Many questions are still unanswered and require further research. ESBG is proud to be part of the European Banking Institute with its excellent academic network, and is delighted to see that the distinguished academic members are delving into the details of sustainable finance to develop advice on practicable, proportionate and smart policy solutions.

It is true that getting sustainable finance right and linking it with local growth and development is challenging, but it is also our mandate for the future. Being sustainable and, in particular, socially committed is not new to savings and retail banks. ESBG members stand ready to leverage their experience, knowledge and local networks to work together with policy-makers to help deliver on this mandate.

[1] ESBG’s sister association, with which it shares a Joint Office, the World Savings and Retail Banking Institute (WSBI) is a supporting institution of UNEP-FI, endorsed its Principles for Responsible Banking and is a signatory of the UN Global Compact.

[2] When drafting this article, an agreement among the EU decision-makers was reached, but the final vote and the publication were still pending.

The practice view

Environmental, social and governance-related disclosures: Present and future novelties

Stéphane Badey, Partner at Arendt Regulatory Consulting (ARC)

Isabelle Lebbe, Partner in the Investment Management practice of Arendt & Medernach

Climate change is becoming more and more visible and while international organizations put the issue on the forefront of the agenda, people all over the world are calling for action.

As the European Commission highlighted, major investments are needed to transform the EU economy and to deliver on climate, environmental and social sustainability goals, including the Paris Agreement and the UN Sustainable Development Goals. The recently proposed Green Deal is a further testimony of the EU’s intentions, but the public sector cannot do it alone.

The financial sector has to play its part and to contribute to the additional EUR 180bn of funding per year[1] that is needed to reach the energy and climate goals of the old continent aiming to become the first climate-neutral continent by 2050.

On the other hand, millennials and women[2] notably fuel growing investor appetite for Environmental Social and Governance (“ESG”) investment strategies and sustainable financial products. The market share of such strategies is continuously growing and has forced the financial sector to innovate and to develop new investment solutions.

This represents a tremendous commercial opportunity for financial market participants, in an area that remains so far largely unregulated and where definitions and interpretations of what is ‘sustainable’ sometimes meet/coincide but often differ.

Therefore, in order to, first accelerate the shift of private capital towards sustainable investments but also mitigate the rampant greenwashing (or even rainbow-washing) risks and to protect investors a strong regulatory response was needed.

In this context the European Commission published in March 2018 an action plan on financing sustainable growth (the “Action Plan”), based on report of the high-level expert group on sustainable finance, specifically aiming to:

reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth;

manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and

foster transparency and long-termism in financial and economic activity.

Shortly after, in May 2018, the Commission adopted a package of measures implementing several key actions announced in its Action Plan. Including:

A proposal for a regulation on the establishment of a framework to facilitate sustainable investment (taxonomy) in order to create a common understanding and definition of what economic activities can be considered environmentally sustainable for investment purposes;

A proposal for a regulation amending the benchmark regulation, which was published on 9th December 2019 (Regulation (EU) 2019/2089 of the European Parliament and of the Council of 27 November 2019 amending Regulation (EU) 2016/1011 as regards EU Climate Transition Benchmarks, EU Paris-aligned Benchmarks and sustainability-related disclosures for benchmarks); and

A proposal for a regulation on disclosures relating to sustainable investments and sustainability risks, which was published on 9th December 2019 (Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector).

This later much awaited regulation on sustainability-related disclosures in the financial services sector (the “Regulation”) applies to all financial market participants, including in particular AIFMs, UCITS management companies, and investment firms, but also applies to financial advisers, and foresees new, mandatory transparency requirements both at entity/asset manager level and at product level.

The new transparency requirements include disclosures on:

the integration of sustainability risks in the investment decisions-making process or the investment advice process,

the consideration of principal adverse impacts of an investment decision on sustainability factors, and

information on how remuneration policies are consistent with the integration of sustainability risks.

At product level, financial market participants will be expected to describe:

the manner in which sustainability risks are integrated into their investment decisions,

the likely impacts of sustainability risks on the returns of the financial products made available, and

how the financial products made available consider principal adverse impacts on sustainability factors.

Additional disclosure requirements are foreseen for financial products that promote, among other characteristics, environmental or social characteristics, or a combination of those characteristics, and for financial products that have sustainable investment as their objective.

This Regulation shall only apply from 10th March 2021, with product rules to be implemented by 30th December 2022. To help financial market participants, the ESAs shall, through the Joint Committee,[3] develop draft regulatory technical standards to specify the details of the presentation and content of the information to be disclosed by 30th December 2020. The European Commission will be responsible for supplementing the Regulation with these regulatory technical standards.

However, in Luxembourg, the Commission de Surveillance du Secteur Financier (CSSF), mindful of greenwashing risks, is already challenging asset managers launching funds with sustainable investment or ESG strategies to provide evidence of what has been done. Investors, on their side, are becoming more and more conscious of sustainability issues and are also putting increasing pressure on financial market participants to act.

For asset managers and other financial market participants the task at hand is not easy: absence of uniform ESG-criteria, varying reporting standards in a complex ecosystem of specialized data providers, nascent formal regulations, and heterogeneous ESG data quality make it difficult to integrate ESG in investment strategies, but also to evaluate the ESG accuracy of any given investing strategies with respect to its objectives.

In the context of the Regulation and the scrutiny from the CSSF and the investors, constitutive and offering documents as well as processes and policies need to be clearly defined in order to avoid any misleading information towards investors. In the absence of strict regulation, transparency towards investors on the internal ESG methodology applied is a key component of a successful and compliant ESG integration.

While the proposals regarding sustainability-related disclosures and the new benchmarks have been voted and published, the taxonomy should for its part be established by the end of 2020, in order to ensure its full application by the end of 2021. This comes after the taxonomy hit a few roadblocks and intense negotiations around certain activities.

Finally, the Action Plan also foresees amendments to existing regulations (UCITS, AIFMD, MiFID, IDD and others) and participates to a global rise of sustainable finance regulation. The Principles for Responsible Investment (PRI) estimates that “Across the world’s 50 largest economies, […] there have been over 730 hard and soft-law policy revisions, across some 500 policy instruments, which support, encourage or require investors to consider long-term value drivers, including ESG factors. Of these top 50 economies, 48 have some form of policy designed to help investors consider sustainability risks, opportunities or outcomes. Sustainable finance policy is a 21st century phenomenon. Of the revisions identified by PRI, 97% were developed after the year 2000[4].

But our bet is that this is just a beginning and that more regulation on the topic will be published in the years to come.

[1] Financing sustainable growth, European Commission, 2018.

[2] “Female investors exhibit greater focus on sustainable investing than male investors” Sustainability through the eye of the investor, Morgan Stanley survey 2015. “A considerable gender gap still exists, with females (33%) embracing ESG at a higher rate than males (21%)”, Women in Business Leadership Boost ESG Performance, IFC 2018.

[3] The Joint Committee is a forum with the objective of strengthening cooperation between the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA), collectively known as the three European Supervisory Authorities (ESAs).

[4] Principles for Responsible Investment, an investor initiative in partnership with UNEP Finance Initiative and UN Global Compact.

Young researchers’ reflections

Putting sustainable finance at the very centre of EU development (and beyond)

Carlos Bosque, Legal counsel European Investment Fund, doctoral candidate at the Universidad Carlos III de Madrid, member of the EBI’s Young Researchers Group (YRG). The views expressed herein are those of the author and not of the European Investment Fund

“Remember, you belong to Nature, not it to you” (Grey Owl)

1. What I talk about when I talk about sustainable finance

Recently, a vast panoply of sustainable-related terms had been naturally incorporated in our financial terminology. Terms as carbon finance, green finance, sustainable finance and circular economy[1] are used ambivalently, without rhyme and reason, and assuming they have an interchangeable character as it all of them refer to the same reality.

And so, it is not rare opening an online journal or the RSS e-mail in the morning and celebrating that X or Y Government, Multilateral Development Bank (MDB) or financial institution agreed to deploy a new facility tackling energy efficiency or increasing renewable energy capacity.

But what is actually sustainable finance? It is broadly understood (in the academia, among policy makers and also in the private sector) that sustainable finance encompasses (a) the provision of financial services (or more generally, performing investments) (b) integrating Environment, Social and Governance (ESG) criteria in the final business decisions, (c) aiming to make a long-term/durable for investors, investees, the society and broadly, all the concerned stakeholders[2].

Building upon this concept, the Commission and, the financial mobiliser of the European Union (EU), the European Investment Bank (EIB), have pledged their efforts to attain the goals of the Paris Agreement, with a view to further ensure a carbon neutral EU by 2050, mobilising to that end heavy regulatory and financial artillery.

Since not only financial means but also regulatory and supervisory measures are required to ensure a smooth transition to a sustainable economy, financial supervisors are timidly embracing the incorporation ESG standards in their supervisory approach -as it will be briefly referred in section 4 below-.

This challenging scenario preludes -in the view of the author- a new era that is likely to alter the way investments are understood in the EU. Bearing this in mind, this article aims at offering a snapshot of the current state of the art, focusing on the recent developments and practices adopted by three major EU actors, the Commission, the EIB and the banking supervision authorities (European Central Bank (ECB) and the National Competent Authorities (NCAs) in the respective Member States).

2. Putting sustainable finance at the very centre of EU development

With a view to seize the main objective agreed in the Paris Agreement[3] and reach the target of limiting global warming to well below 2°C above pre-industrial levels (Art. 2.d) of the Agreement) -and now also attain the ambitious goal of having a carbon neutral Union by 2050[4]- the Commission issued its Action Plan: Financing Sustainable Growth.

The Action Plan aims at putting sustainable development (and sustainable finance) permanently at the very heart of the EU. In a nutshell, the Action Plan envisages to act though three main axis: (1) reorienting capital flows towards sustainable investments in order to achieve sustainable and inclusive growth; (2) managing financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and (3) fostering transparency and long-termism in financial and economic activity.

Each of these objectives directly impacts in the way we understand sustainable finance at this moment, and to the extent ESG variables are incorporated in any kind of financial investment.

(1) As per the first objective of the Action Plan, it aims at introducing (among other measures) a sustainable finance taxonomy which, at the end, would determine the range of activities to be considered sustainable[5]. In addition, an amendment of the Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive (IDD) is proposed to allow investment firms and insurance distributors to take into account clients´ sustainable preferences when offering advice (for instance, in the suitability assessment)[6].

(2) In connection with the second axis, Regulation 2019/2088 on disclosures relating to sustainable investments and sustainability risks was issued. This Regulation aims at setting out the manner in which financial market participants will have to factor in ESG elements within their investing decision-making process and disclose information related to this matter to end investors. Linked to this measure, the Commission envisages to modify the prudential requirements applicable to credit institutions and insurance companies to take into account ESG impacts on their business and capital levels.

(3) Finally, and as per the third objective, the Action Plan looks forward attenuating short-termism when taking decisions -specially as regards capital markets-. With a view to achieve this goal, the European Supervisory Authorities (ESAs) -specially the European Market and Securities Authority (ESMA)- should conduct a thoroughly analysis, in liaison with relevant stakeholders. The practical implementation of this objective, for the time being, seems to be at an embryonic stage.

3. EIB commitments: encompassing the Action Plan

On 14 November 2019 the EIB’s Board of Directors took an irreversible step towards sustainable finance. That day, the EIB approved its Energy Lending Policy, phasing out support to energy projects reliant on unabated fossil fuels (Para. 11).[7]

Although limited to energy lending -i.e. not impacting on other policies, such as clean mobility policy, policy supporting nuclear power generation, etc. as per Paras. 11-13-, it is not adventurous observing that the EIB has become the first multilateral development bank -and the biggest in the world so far- in pledging its action to the objectives embedded in the Paris Agreement[8].

With a view to attaining the Paris Agreement’s goals, the EIB Lending policy plans to act over four thematic areas related to climatic objectives. Those include: (i) energy efficiency investments -specially concerning residential buildings-, (ii) decarbonizing energy supply; (iii) investing in low-carbon technologies; and (iv) securing the enabling infrastructure -i.e. strengthening energy networks-.

In order to provide additionality, the EIB shall make available support to correct the market gap spotted in connection with investments related to the abovementioned areas[9]. In connection with the foregoing, EIB decisions on energy lending shall be taken to meet long-term or durable goals. Finally, the EIB commits to embrace innovative energetic technologies, exploring new market-based investments in the energy sector.

All in all, in the author’s view, what really constitute a game-changer is the whole process of pegging long term investment decision with ESG factors and, especially, with the objectives of the Paris Agreement. The model well deserves being studied and replicated broadly in the financial world -and not only as regards MDB- a sample of how to guide sustainable finance in a complex corporate body[10].

4. Prudential supervisors as the next step to fully integrate sustainable finance and climate risk in the banking business

Investment decisions are inextricably linked to credit institutions´ financial health and capital requirements. In this vein, the investment assessment process of any financial institution impacts on (and may hamper) its capital levels.

Among other risk factors, external elements, disconnected from typical business or investing-risks may hamper financial institutions´ capital requirements[11]. Thus, climate risks, already represent (and will continue representing in the future) a relevant factor to be considered when assessing institutions decision-making processes and resilience.

With a view to monitor and eventually tackle climate risks, the ECB already included climate-related risks among the 2019 key risk drivers affecting the euro area banking system[12]. So far, it seems the ECB and the rest of NCAs are facing a transitory stage, raising awareness among credit institutions through the Supervisory Review and Evaluation Process (SREP)[13].

At the level of national supervisors, it is worth noting the leading initiative deployed by the Banco de España -the central bank of Spain-, who has intensified contacts with the Spanish credit institutions to request them data regarding their exposure to climate change, with a view to build a reliable data base on the matter[14].

Further regulatory developments are needed to encompass the supervisory tasks entrusted to financial supervisors concerning the monitoring of climate risks and the inclusion of ESG factors within the investing decision-making process. The European Banking Authority (EBA) working plan 2020 clearly points towards this direction by proposing to incorporate ESG into risk management, and improving the classification and prudential treatment of assets from a sustainability perspective (Paras. 16-17).

Last, it must be recalled that central banks (including the ECB) are wondering whether they could (and should) play a role in mitigating climate risks, by acting through the monetary policy chain[15]. This last possibility triggers a number of constitutional considerations linked to accountability considerations and the scope of the democratic mandate entrusted to central banks, but this would well require a separated (and lengthy) analysis.

5. Conclusion

Sustainable finance is not a new fashionable concept that will fade away easily; we are at the verge of the transition to a new model. We should first be aware of the terminology we are using, in order not to confuse greenish finance terms with sustainable finance.

The Commission, in its Action Plan: Financing Sustainable Growth has already pointed out the master axes to be followed and further developed in the upcoming years. Aiming at attaining the objectives set out in the Paris Agreement, the EIB Energy Lending Policy represents an avant-garde initiative that can be taken as a model of how to enshrine long-term and ESG factors into the decision-making progress of a complex body.

Finally, prudential supervisors (and even monetary authorities) are paying an increasing interest on how to monitor climate risks and assess the incorporation of ESG factors in the investing process. Yet, the appropriate regulatory framework for that purpose needs to be developed.

[1] Cfr. As a mere sample the digital glossary edited by the Swiss association, Swiss Sustainable Finance.

[2] See Final report of the High-Level Expert Group on Sustainable Finance at Pp. 6 and 9 to 11. See also Action Plan: Financing Sustainable Growth (COM/2018/097 final).

[3] See the Paris Agreement made in that city on 12 December 2015, in force as from 4 November 2016.

[4] Objective endorsed by the European Council on 12 December 2019 (Para. 1). This objective stands for all the EU member except for Poland, who was unable to commit to attain such objective. This matter will be discussed again in June 2020.

[5] Cfr. The proposal for a Regulation of the European Parliament and of the Council on the establishment of a framework to facilitate sustainable investment (COM(2018) 353). The proposal, as approved by the Parliament, is awaiting the Council first reading (and the relevant budgetary conciliation between the European Parliament, Council and Commission positions).

[6] See the proposal for a Commission Delegated Regulation amending Regulation (EU) 2017/2359 as regards the integration of Environmental, Social and Governance (ESG) considerations and preferences into the investment advice for insurance-based investment products.

[7] The EIB will continue to approve (fossil-fuel) projects already under appraisal until the end of 2021 to manage appropriately the backlog of existing projects.

[8] Yet, not the first time the EIB leads the change towards a greener finance, as it did already in 2007 when issued the first green bonds ever issued in the world.

[9] This support can reach, for certain kind of investments (e.g. those related to the energy efficiency axis) up to 75% of the eligible project capital costs (when usually EIB support does not go above 50% of eligible capital costs).

[10] Including an innovative carbon pricing mechanism (cfr. Annex V of the EIB Lending Policy).

[11] Let´s think, for example, in urban development projects related to coastal areas that may be flooded in case of global temperature continue increasing. Or the opposite case: finance provided to build a resort in the surroundings of a lake or swamp whose existence is being menaced by desertification. Samples are multiple, especially as regards the insurance sector, given the raise of violent climate phenomena occurring more often every time -and causing considerable losses-.

[12] See ECB Newsletter issued on 15 May 2018.

[13] Specifically, through the qualitative dialogue held between the relevant credit institution and the ECB (or national supervisor), on an individual basis. See the speech by Yves Mersch, Frankfurt, 27 November 2018.

[14] See, among other pieces of news.

[15] For instance, accepting easily sustainable assets as guarantees in exchange for short-term liquidity, favoring certain categories of sustainable investment eligible for bond purchases (if any), etc.

Taxonomy Regulation: Creating a common language for the environment and finance

Agnieszka Smolenska, PhD European University Institute (EUI) and Coordinator of the EBI’s YRG

1. General aspects

The Taxonomy Regulation, or the regulation on the establishment of a framework to facilitate sustainable investment which was agreed by EU institutions late in 2019 and awaiting formal adoption in early 2020, lays down the criteria for deciding which types of economic activities are to be considered environmentally sustainable under EU law. In doing so, this rather concise piece of legislation seeks to achieve something remarkable: to create a common language between environmental objectives and financial regulation, while facilitating the flow of private funds to public goals. This brief contribution explains the main tenets of the new regulation in order to sketch its implications.

In December 2019, just after the crucial European Council which formally approved the EU-wide objective of climate neutrality by 2050, negotiators of the Member States and the European Parliament reached a formal agreement on the EU Taxonomy Regulation, which lists the objectives that economic activities have to pursue and the criteria they should meet in order for investments to be considered (and labelled) as environmentally sustainable. Most of the provisions will apply from 2021.

The regulation will apply to three sets of actors: financial institutions, public corporations, and Member States. Specifically, it applies to fund managers and institutional investors who offer financial products to consumers and want to label these as environmentally sustainable. Consequently, the new rules will affect the marketing of investment products by establishing a checklist of criteria which have to be met for a product linked to a specific investment to be deemed “sustainable.” Second, the rules will govern the non-financial disclosures of large corporations which are subject to the 2019 Disclosure Regulation; these will have to disclose the proportion of their turnover which is associated with environmentally sustainable activities as part of their annual reporting. Thirdly, the vernacular established by the framework is to be followed by Member States when introducing any gold-plating regulations on environmental sustainability of financial products of corporate bonds (Art. 1). Such a scope is broad but also fragmented. As a result, the regulation will impact upon distinct areas: financial markets, corporate governance, and national legislative processes. The compliance is to be ensured through sanctions levied by financial regulators (Art. 15).

The new taxonomy regulation uniquely couples economic and environmental goals of integration as defined by EU Treaties (Art. 3(3) TEU), by providing a common list of environmental objectives: climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems (Art. 5).

The regulation devises specific conditions which allow to ascertain the causality between the effects of a given economic activity and the impact on a specific objective. These are – cumulatively – that: the activity must contribute significantly to the objective, it must not significantly harm any of the objectives, it must comply with the minimum safeguards as well as the technical screening criteria developed by the European Commission (Art. 3). The positive prong requires that the activity contributes to one or more of the environmental objectives in the long term, taking into account economic asset lifecycle considerations (Art. 11). The rules differentiate, however, between enabling activities for climate change mitigation (Art. 11a), acknowledging that some activities may be transitionary in nature, where there are no technologically and economically feasible low carbon alternatives (Art. 6(1a)).

The harm component evaluates whether the economic activity, for example, causes significant greenhouse gas emission, has adverse impact “on the current and expected climate”, deteriorates the status of water, leads to inefficiencies in the use of materials, increases release of pollutants or acts to the detriment of resilience of ecosystems (Art. 12). In the absence of reliable scientific evidence, authorities should follow the precautionary principle approach outlined in the Treaty (Art. 191 TFEU).

The minimum criteria require that the economic activities comply basic international corporate law standards (OECD Guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights, including the principles and rights set out in the eight fundamental conventions identified by the International Labour Organization (ILO) (Art. 13).

The technical screening criteria are to be developed through delegated regulations of the European Commission, also with regard to the specific safety clauses for transitionary technologies (recital 33, Arts. 11a, 16), under the scrutiny of two new bodies– the Platform on Sustainable Finance (PSF, Art. 15) and Member States Expert Group (MSEG, Art. 16b). PSF is to be broadly representative and will be composed of numerous EU agencies which span environmental issues (European Environment Agency, EEA), finance (European Supervisory Authorities, ESAs), European Investment Bank (EIB), fundamental rights, experts representing stakeholders, civil society, and academia. The function of the Platform extends beyond advice and analysis, to monitoring of the implementation and suggestion of reforms under the Taxonomy Regulation Review clauses. MSEG shall advise the European Commission on the appropriateness of the technical screening criteria, but it does not have a formal veto over the technical screening criteria developed. To the extent that the rules concern financial market operators, they rely on further technical standards to be developed by the European Financial Supervisory Authorities, regarding the formal requirements concerning the presentation and the content of the information to be provided to the investor (Amendments to Regulation 2019/2088 (Disclosure Regulation).

2. The impact

The Taxonomy Regulation creates a framework for determining whether an economic activity is environmentally sustainable. By creating a common language for EU’s environmental and financial regulation policy, the taxonomy can be placed within two broader trends in EU law, namely the increasing granularity and liability of private actors in EU financial regulation and the new green wave sweeping EU institutions.

The first trend concerns the overall aims and tools in financial regulation, which in the EU have become increasingly granular and prescriptive in terms of guiding the regulated financial activity. This includes the regulation of private contracts which financial actors enter into, not only regarding general disclosure or consumer protection rules, but also the standardization of such information.

The second trend is marked by an overarching and transversal concern with environmental goals as pursued by the European Commission which took office in December 2019, which has vowed, inter alia, to implement climate neutrality by 2050 (see also European Council 2019).

These two trends coincide in the context of new set of rules relating to the Capital Markets Union, a project which seeks to stimulate private money and cross-border financial transactions as a means to overcome the economic slowdown by increasing the availability of finance to stimulate investments.

The regulation creates a complex mechanism for identifying the relevant scientific insights, the balance between a teleological and precautionary approaches, as well as a broader embeddedness in governance criteria. Through this process, legislators have hoped to create a common environmental language for financial regulation which is legitimate, and therefore broadly followed. Based on this experiment, the regulation hopes to go even further, namely, to be a template for clearer operationalization of social objectives in financial regulation. The practice of developing the technical rules as well as the role of advisory bodies such as the Sustainable Finance Platform, should be closely scrutinized not just by financial regulation scholars, but also those with an interest in the accountability of the EU’s regulatory state.


D. Ramos Muñoz (coordinator), E. Leone, T. Gstaedtner, E. Wymeersch, B. Joosen,

B. Clarke, M. Lamandini, T. Tröger, G. Ferrarini, and D. Busch


M. Cecilia del Barrio Arleo and Carlos Bosque Argachal



The European Banking Institute based in Frankfurt is an international centre for banking studies resulting from the joint venture of Europe’s preeminent academic institutions which have decided to share and coordinate their commitments and structure their research activities in order to provide the highest quality legal, economic and accounting studies in the field of banking regulation, banking supervision and banking resolution in Europe. The European Banking Institute is structured to promote the dialogue between scholars, regulators, supervisors, industry representatives and advisors in relation to issues concerning the regulation and supervision of financial institutions and financial markets from a legal, economic and any other related viewpoint.

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