European Commission and Sustainable Finance

We take a closer look at the European Commission’s work towards providing policies and guidance for sustainable finance.

The European Commission recently (June 18) published an updated version of its non-binding guidelines regarding climate-related information. In addition, a Commissioned-associated expert group (Technical Expert Group, TEG) also released 3 reports:

Report on a common taxonomy on sustainable activities

Report on an EU green bond standard (GBS)

Report on EU climate benchmarks and benchmarks’ ESG disclosures

EU Taxonomy

A quick glance at TEG’s taxonomy report reveals 67 proposed activities that contribute to climate change mitigation and their relevant technical screening criteria. These economic activities cover seven sectors: electricity supply, transport, water, agriculture and forestry, manufacturing, ICT and buildings – and outline the most comprehensive taxonomy/classification system for sustainable activities to date. Such clear guidance on activities that qualify as contributing to climate change mitigation and environmental objectives will help inform investors who want to invest more sustainably.

EU Green Bond Standard

The EU Green Bond Standard is brought forward with a view to increase transparency and comparability within the green bond market, as well as to provide clarity to issuers on the steps to follow for an issuance, in order to scale up sustainable finance.

TEG concludes that the EU Green Bond Standard would address several barriers in the current market, including by reducing uncertainty on what is green; linking it with taxonomy, standardising verification and reporting processes; and having an official standard to which incentives and ecolabels could be attached.

The EU Green Bond Standard would comprise four critical elements:

  • Alignment with EU-taxonomy for use of proceeds
  • Publication of a Green Bond Framework, which confirms the voluntary alignment of green bonds issued with the EU GBS
  • Mandatory reporting on use of proceeds (allocation report) and on environmental impact (impact report)
  • Mandatory verification of the Green Bond Framework and final allocation report by an external reviewer

It is expected that the Commission will decide on these recommendations early 2020.

The proposed EU Green Bond Standard will create a common and safe ground for issuance.

“It is a common framework for everybody to refer to and use as a benchmark. Investors and issuers will get guidance on what is at least safe ground”, said Aila Aho, rapporteur of the green bond standard sub-group of the EU’s Technical Expert Group on Sustainable Finance (TEG), and Executive Adviser at Nordea.

“We see the EU GBS and Taxonomy to also support further strengthening and harmonization of the green loan market, as these are inherently something banks need to have in the back of their minds when originating green loans (that may then at a later stage be refinanced through banks’ own green bonds)”, said Juho Maalahti, Sustainable Loans, Investment Banking, Nordea.

Ailia Aho & Juho Maalahti, Nordea

Ailia Aho & Juho Maalahti, Nordea

 

Benchmarks and sustainability

Benchmarks are indexes bringing together securities to reflect the current state and development of a market. These benchmarks help investors follow an investment strategy with specific objectives.

Benchmarks therefore have the capacity to strengthen investors’ alignment with sustainability objectives, while improving integration of sustainability risks.

Therefore, the Commission, EU co-legislators agreed to create two new types of climate-related benchmarks (EU Paris-Aligned Benchmarks and EU Climate Transition Benchmarks) and to require ESG disclosures for all benchmarks. TEG published its final report on Benchmarks in September, taking into account the outreach feedback received over the summer.

TEG’s mandate has been extended until the end of 2019, and it is expected to work on further user guidance on how to use the taxonomy and EU GBS.

 

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