EU Sustainable Finance

Sustainable Finance in the EU

Sustainable Finance is a key element of EU policies, including those on

• Investment and Growth,
• Climate and Energy and Environment and
• the Capital Markets Union.

This reflects a growing awareness in Europe that sustainable economic development, employment and environmental goals such as clean air and a safe climate must be in alignment.

High Level Expert Group

At the end of 2016, the European Commission appointed the High-Level Expert Group (HLEG) on Sustainable Finance with a mandate to recommend financial reforms on which to base the EU strategy on sustainable finance. The group, composed of members and observers from banking, insurance, asset management, stock exchanges, financial industry associations, international institutions and civil society began work in January 2017 and delivered their final report in January 2018.

The report includes eight key recommendations and several cross-cutting and sector-specific recommendations to align the financial system with sustainability goals.

• To introduce a common EU Sustainable Finance Taxonomy to ensure market consistency and clarity, starting with climate change. If Europe is to mobilise capital at scale for sustainable development, it needs a technically robust classification system to establish market clarity on what is ‘green’ or ‘sustainable’. Introducing a sustainability taxonomy, starting with climate-mitigation around mid-2018, will enhance market efficiency and channel capital flows towards assets that contribute to sustainable development.
• To clarify investor duties to extend time horizons and bring greater focus on ESG Factors. Linking investor duties to the Investment Horizon of the individuals or institutions they serve and requiring, within institutional client relationships, informed consent on sustainability issues are essential. An EU omnibus proposal would ensure that these changes take place across the entire investment chain.
• To upgrade Europe’s disclosure rules to make climate change risks and opportunities fully transparent. A transparent financial system is a prerequisite for sustainable finance. An interconnecting framework of effective sustainability disclosure covering financial products, financial assets, financial institutions and financial authorities is thus essential.
• To empower and connect Europe’s citizens with sustainable finance issues. A sustainable financial system should be transparent and accountable to EU citizens. Improving access to information on sustainability performance and promoting Financial Literacy are essential elements of that effort.
• To develop official European sustainable finance standards, starting with one on green bonds. As a first step, the EU should introduce an official EU Green Bond Standard (EU GBS) and consider an EU Green Bond label or certificate to help the market to develop fully and to maximise its capacity to finance green projects that contribute to wider sustainability objectives.
• To establish a ‘Sustainable Infrastructure Europe’ facility to expand the size and quality of the EU pipeline of sustainable assets. Reliable, inclusive and high-quality infrastructure is a vital component of sustainable long-term economic growth. To ensure adequate investment in sustainable and resilient infrastructure, an at-scale solution is needed where existing public institutions and initiatives are used with maximum effect.
• To reform governance and leadership of companies to build sustainable finance competencies. The culture of the financial sector needs to be aligned more closely with long-term perspectives and the promise of a sustainable financial system that is useful to society. Strengthening director duties and stewardship principles are steps in that direction.
• To enlarge the role and capabilities of the ESAs to promote sustainable finance as part of their mandates. In September 2017, the Commission announced that the upcoming action plan on sustainable finance (Q1 2018) would include provisions to strengthen regulatory and supervisory framework of the ESAs. The HLEG provides some specific recommendations on how to interpret the inclusion of sustainability in their mandate

EBA Guidelines on Loan Origination and Monitoring

The European Banking Authority (EBA) developed the Guidelines on loan origination and monitoring in response to the Council of the European Union’s Action Plan on tackling the high level of non-performing exposures. The European Council, in its July 2017 Action Plan, invited the EBA to ‘issue detailed guidelines on banks’ loan origination, monitoring and internal governance which could in particular address issues such as transparency and borrower affordability assessment’.

The guidelines where finalized in report EBA/GL/2020/06 and include a number of provisions for the inclusion of ESG criteria in bank lending.