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A guide to the EU’s renewed sustainable finance strategy

A guide to the EU’s renewed sustainable finance strategy

The European Commission in 2018 adopted its first Action Plan on financing sustainable growth. On 6 July, it released its renewed Strategy for Financing the Transition to a Sustainable Economy. Nordea’s Sustainable Finance Advisory equips you with a pocket summary of the actions included.

The European Commission’s first Action Plan on sustainable finance, adopted in 2018, was a major step in the EU’s commitment to channel private financial flows towards investments that support the Paris Agreement target of a carbon-neutral economy by 2050. Since 2018, the EU has established building blocks for a sustainable finance system, including the EU Taxonomy, the Sustainable Finance Disclosure Regulation (SFDR), the Corporate Sustainability Reporting Directive (CSRD) and the European Green Bond Standard unveiled on 6 July.

Following advice from the experts of the Platform on Sustainable Finance and an extensive stakeholder consultation, the Commission has now published its renewed Strategy for Financing the Transition to a Sustainable Economy. The strategy includes four areas where additional actions are needed for the financial system to fully support the transition towards sustainability.

The key areas and related actions of the Renewed Sustainable Finance Strategy are summarised below.

Area 1: Financing the path of the real economy towards sustainability

To extend the existing sustainable finance toolbox to facilitate access to transition finance, within and beyond climate, the Commission will:

Add to the EU Taxonomy:

  • The Comission will adopt a Complementary EU Taxonomy Climate Delegated Act covering new sectors, including agriculture and certain energy activities.
  • Technical Screening Criteria for the remaining four environmental objectives: water, circular economy, pollution and biodiversity – to be adopted in H1 2022

Increase the focus on transition activities by:

  • considering to propose legislation to support the financing of certain economic activities (energy sector, including gas) that support the transition towards climate neutrality
  • considering to provide options for the EU Taxonomy to more broadly cover transition activities
  • producing a report on a so-called Neutral and a Brown Taxonomy that will be published at the end of 2021

Develop additional sustainable finance standards and labels, for example:

  • development of additional bond labels such as transition and/or sustainability-linked bonds
  • labels for ESG Benchmarks and financial products will be considered
  • considerations to adjust the Prospectus Regulation to create minimum requirements for all ESG non-equity securities

Area 2: Towards more inclusive sustainable finance supporting a green recovery

To improve the inclusiveness of sustainable finance, the Commission will:

Provide access for SMEs and retail investors by:

  • asking the European Banking Authority (EBA) for its opinion on definitions and tools for green retail loans and green mortgages
  • exploring how to include energy efficiency mortgages in the Mortgage Credit Directive review
  • increasing information to households and businesses on the benefits of sustainable loans
  • improving advisors’ level of sustainability expertise
  • publishing a framework for adults and youth with information on skills and knowledge needed for financial well-being as well as on how to access sustainable finance
  • preparing a simplified, voluntary sustainability reporting standard for SMEs

Make use of digital technologies for sustainable finance by:

  • enabling and encouraging digital sustainable finance tools for SMEs
  • potentially expanding the EU Taxonomy to include additional activities supporting sustainable digital solutions and use of sustainable crypto-assets
  • The EU will take the lead in making the digital infrastructures climate neutral and energy efficient by 2030

Increase insurance coverage through:

  • initiation of a Climate Resilience Dialogue to identify ways to address climate protection gaps with relevant stakeholders

Support credible social investments by:

  • engaging with the ESAs to improve regulatory technical standards under the SFDR
  • publishing a report on a Social Taxonomy – end of 2021

Risk-sharing between public and private investors:

  • Strengthen tracking methodologies for climate and biodiversity spending to support EU member states that want to redirect their national budget to green priorities

Area 3: Improving the financial sector’s resilience and contribution to sustainability – the double materiality perspective

To enhance economic and financial resilience to sustainability risks, the Commission will:

  • assess if the International Financial Reporting Standards (IFRS) appropriately integrate sustainability risks
  • consider proposing an initiative to improve transparency and ensure inclusion of ESG factors in credit ratings and credit outlooks
  • propose amendments to the CRR/CTD to ensure ESG factors are consistently included in risk management systems of banks
  • clarify and strengthen the role of supervisors in assessing ESG risks
  • bring forward the date of EBA’s ongoing assessment of the prudential treatment of exposures from 2025 to 2023
  • make amendments to the Solvency II Directive to integrate sustainability risks in the risk management systems of insurers. EIOPA will assess the risk differentials between sustainable and other exposures in insurance
  • prepare a report on the measurement and presence of financial risks stemming from a significant loss of biodiversity in the EU
  • consider whether macro-prudential tools are fit to address climate and environmental-related financial stability risks

To strengthen the contribution of the financial sector to sustainability, the Commission will:

Accelerate the contribution of the financial sector to transition efforts by:

  • examining to what extent more guidance is necessary to ensure voluntary pledges by financial institutions to adopt strategic science-based climate and environmental targets are credible and allow progress to be monitored over time across the EU
  • asking EIOPA to assess the potential need to broaden the concept of “long-term best interest of members and beneficiaries” and introduce the notion of double materiality in the pension framework
  • considering and assessing further measures to enable all relevant financial market participants and advisers to consider sustainability impacts of their investment decisions on a systematic basis
  • supporting investors’ engagement activities to hold investee companies accountable for aligning their business strategies and activities with the EU sustainability goals and review the Shareholder Rights Directive II
  • considering proposing an initiative to strengthen the reliability and comparability of ESG ratings

To monitor an orderly transition and ensure the integrity of the EU financial system, the Commission will:

  • assess whether supervisory powers, capabilities and obligations are fit for purpose with regards to greenwashing risks and, based on this, propose potential improvements
  • assist Member States in assessing the EU investment gap and its progress
  • strengthen cooperation with relevant public authorities
  • establish a Sustainable Finance Research Forum to foster knowledge exchange between researchers and the financial community

Area 4: Fostering global ambition

To set a high level of ambition in developing international sustainable finance initiatives and standards and support EU partner countries, the Commission will:

Promote an ambitious consensus in international forums by:

  • suggesting that the Financial Stability Board expand its mandate to cover the contribution of the financial system to global climate and environmental objectives
  • advocating for international forums and standard-setters to develop ambitious standards and principles for disclosure
  • cooperating with partners in international fora to agree on common objectives and principles for taxonomies

Advance and deepen the work of the International Platform on Sustainable Finance through:

  • proposing to expand the work of the IPSF to new topics, other than a common ground Taxonomy, and strengthen its governance

Support developing countries in their transition efforts by:

  • supporting EU partner countries in their transition efforts via a strategy and tools to help scale up sustainable finance

The Commission will report on the implementation of the strategy by the end of 2023.

Authors:

Ebba Ramel, Sustainable Finance Advisory, Nordea.

Johanna Björk, Sustainable Finance Advisory, Nordea

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