New Measures to Green the EU's Financial System
On July 6, the European Commission has adopted a new set of measures to ensure a level playing field in sustainable finance with:
The new Sustainable Finance Strategy
The European Green Bond Standard proposal
THE SUSTAINABLE FINANCE STRATEGY
The “Strategy for Financing the Transition to a Sustainable Economy” sets out how the objectives of the European Green Deal are translated throughout the financial system and ensures actors across all sectors of the economy can finance their transition regardless of their starting point.
The ambition is to have all relevant stakeholders taking action in their respective areas so that we can meet the massive need for private and public investment triggered by Europe’s green and digital transition.
In the new strategy, based on the 2018 action plan on sustainable finance, the European Commission identifies sets of measures in 4 main areas:
FINANCING THE TRANSITION TO SUSTAINABILITY
ACTION 1
Consider proposing legislation to support the financing of certain economic activities, mainly in the energy sector – including gas - that help to reduce greenhouse gas emissions.
Consider options for extending the EU Taxonomy framework to possibly recognise economic activities performing at an intermediate level of environmental performance.
By the end of 2021, the Commission will publish a report describing the provisions required to cover economic activities that do not have a significant impact on environmental sustainability and economic activities that significantly harm environmental sustainability.
Adopt a Complementary EU Taxonomy Climate Delegated Act covering new sectors including agriculture and certain energy activities – nuclear energy, natural gas, and related technologies.
Adopt a delegated act under the EU Taxonomy covering the remaining four environmental goals - water, biodiversity, pollution prevention, and circular economy - by Q2-2022.
Consider a general framework for labels for financial instruments, work on other bond labels such as transition or sustainability-link bonds, an ESG Benchmark label, minimum sustainability criteria for financial products that promote environmental or social characteristics, and introduce targeted prospectus disclosures.
For more details, see p.5 of the document.
INCLUSIVENESS OF THE SUSTAINABLE FINANCE FRAMEWORK
ACTION 2
Explore options to facilitate the uptake of green loans and mortgages by 2022.
Integrate sustainable finance-related data in the data spaces under the European Data Strategy to support SMEs and retail investors.
Identify insurance protection gaps through European Insurance and Occupational Pension Authority (EIOPA)’s natural disaster dashboard and initiate a Climate Resilience Dialogue with all relevant stakeholders in 2022.
Publish a report on a social taxonomy by the end of 2021.
Strengthen tracking methodologies for climate and biodiversity spending and organise an inaugural annual Sustainable Investment Summit ahead of COP 26.
For more details, see p.7 of the document.
Financial Sector’s Resilience and Contribution to sustainability
ACTION 3: To enhance economic and financial resilience to sustainability risks.
Work with the European Financial Reporting Advisory Group (EFRAG), the European Securities and Markets Authority (ESMA), and the International Accounting Standards Board (IASB) on how financial reporting standards can best capture relevant sustainability risks.
Ensure that relevant ESG risks are systematically captured in credit ratings and rating outlooks in a transparent manner (2023).
Propose amendments in the Capital Requirements Regulation and Capital Requirements Directive to ensure the consistent integration of sustainability risks in risk management systems of banks, including climate change stress tests by banks (2021).
Propose amendments in the Solvency II Directive to consistently integrate sustainability risks in risk management of insurers, including climate change scenario analysis by insurers (2021).
Strengthen long-term financial stability through closer cooperation on financial stability risk assessment, regular stress tests, an assessment of macro-prudential tools and a study dedicated to risks stemming from environmental degradation and biodiversity loss.
ACTION 4: To increase the contribution of the financial sector to sustainability.
Improve financial institutions’ disclosures of sustainability targets and transition planning.
Ask EIOPA to assess the need to review the fiduciary duties of pension funds and investors to reflect sustainability impacts as part of investment decision-making processes by 2022.
Take action to improve the reliability and comparability of ESG ratings and further assess certain aspects of ESG research, to decide on whether an intervention is necessary.
ACTION 5: To monitor an orderly transition and ensure the integrity of the EU financial system.
Monitor greenwashing risks and assess and review the current supervisory and enforcement toolkit available to competent authorities.
Develop a robust monitoring framework to measure capital flows and assist the Member States in assessing the investment gap and measuring the progress made by their financial sectors (by 2023).
Strengthen cooperation among all relevant public authorities to work towards a common approach to monitor an orderly transition and ensure the double materiality perspective is consistently integrated across the EU financial system (by 2022).
Establish a Sustainable Finance Research Forum to foster knowledge exchange between researchers and the financial community.
For more details, see p.11 of the document.
GLOBAL AMBITION
ACTION 6
Seek an ambitious consensus in international forums, mainstream the concept of double materiality, stress the importance of disclosure frameworks, and agree on objectives and principles for taxonomies.
Propose to expand the work of the International Platform on Sustainable Finance (IPSF) to new topics and strengthen its governance.
Support low- and middle-income countries in scaling up their access to sustainable finance.
For more details, see p.18 of the document.
THE GREEN BOND STANDARD
Green bonds help to finance climate-mitigating investments, for example, energy production and distribution, resource-efficient housing, and low-carbon transport infrastructure. With the new proposal, the European Commission aims at creating a voluntary “gold standard” for green bonds so that companies and public bodies can more easily raise large-scale financing for climate and environmentally-friendly investments while protecting investors from greenwashing.
The European Green Bond Standard (EUGBS) is:
Inclusive: It will be open to all EU and non-EU issuers, including corporates, sovereigns, financial institutions, and issuers of covered bonds and asset-backed securities. Specific, limited, flexibility will be provided for sovereign issuers.
Voluntary: It will be a voluntary standard-setting out uniform requirements for any bond issuers that wish to call their bond a “European green bond” or “EUGBS”.
Aligned with the EU Taxonomy: The standard requires that issuers must allocate 100% of the funds (proceeds) raised by their bond to economic activities that meet the EU Taxonomy requirements, by the time the bond matures.
Supporting issuers in transition: European green bonds can be used to fund long-term projects (duration up to 10 years) that make an economic activity aligned with the EU Taxonomy.
Externally reviewed: European green bonds will be checked by an external reviewer to ensure that the bonds are compliant with the EUGBS Regulation, in particular the Taxonomy-alignment of the funded projects. External reviewers will be registered with the European Securities and Markets Authority (ESMA) and will need to meet the conditions for registration on an ongoing basis.
Grandfathering: In the event of a change in the EU Taxonomy Technical Screening Criteria (TSCs) after bond issuance, issuers can make use of pre-existing criteria for five more years.
There are three main ways in which European green bonds can be used by companies to support their sustainability transition:
Funding long-term projects: Issuers may use European green bonds to fund multi-year Taxonomy-alignment projects, such as converting a production facility (like a steel plant) to reduce its emissions and meet the Taxonomy thresholds. The condition is that the transformation results in an EU Taxonomy-aligned project.
The transition towards Taxonomy-alignment: A company could issue a European green bond to acquire or construct an EU Taxonomy-aligned asset, such as a new energy-efficient building. In this way, the company is gradually increasing its share of Taxonomy-aligned assets.
Transition activities: the EU Taxonomy sets out a range of criteria for ‘transition activities', such as cement and steel manufacturing.
Next Steps
The proposal will be submitted to the European Parliament and Council as part of the co-legislative procedure. By the end of 2023, the Commission will report on the Strategy's implementation and will actively support the Member States in their efforts on sustainable finance.
For more information:
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