New standard for European green bonds to facilitate raising capital for sustainable projects

The European Commission has presented the Strategy for Financing the Transition to a Sustainable Economy, a proposal for standards for European green bonds and non-financial reporting requirements complementing the Taxonomy Regulation. However, the European Court of Auditors' Special Report states that despite these steps, the Commission is not making sufficient efforts in the area of sustainable financing. In addition to increasing the transparency of financial products, the Court believes it is important to develop measures that genuinely address the issue of unsustainable business.

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New Strategy for Financing the Transition to a Sustainable Economy

In 2018, the European Commission adopted the Action Plan for Financing Sustainable Growth, which introduces three key elements of a sustainable financing framework: a taxonomy of sustainable activities, a framework for disclosure of non-financial information, and investment tools to support the transition to sustainability. We regularly report on the implementation of these elements in the EnviLaw newsletter. However, since 2018, the Green Deal for Europe has been tightening the previously set environmental targets, and therefore the European Commission has proceeded to revise the aforementioned Action Plan and presented a Strategy for Financing the Transition to a Sustainable Economy. This aims to make the framework of sustainable financing functional and internally consistent.

The strategy identifies four key areas where the Commission believes further action is needed to achieve the environmental objectives:

  • Financing the transition to sustainability. The Strategy proposes to expand the current set of instruments for sustainable financing and to facilitate access to financing the transition to sustainability.
  • Inclusiveness. The Strategy emphasises the need for greater support for SMEs and individuals in the transformation of the economy.
  • Financial sector resilience and contribution. The Strategy outlines how the financial sector should contribute to the objectives of the Green Deal for Europe.
  • Global ambition. The Strategy addresses how to promote the issues of sustainable financing internationally.

The Commission intends to implement most of the measures by 2023 and plans to publish a report on the implementation of the Strategy in the same year to show whether the ambitious plans for sustainable financing are being delivered.

Proposal for a regulation on European green bonds creates new standards

Following the Action Plan, the European Commission also presented a proposal for a regulation on European green bonds. The aim is to create an international standard in this area and to ensure that uniform requirements apply to the use of the “European Green Bond” or “EuGB” designation. Another objective of the regulation is to facilitate the raising of capital for projects that pursue the environmentally sustainable objectives set out in the Taxonomy Regulation. According to the European Commission, the new standard will give green bond issuers a reliable tool to demonstrate that they are financing projects in line with the taxonomy. This will make it easier for investors to assess whether their investments are truly sustainable.

The proposal contains extensive transparency requirements for issuers of green bonds. In addition, all the bonds will be subject to external assessment to ensure compliance with the taxonomy. The proposal also foresees the introduction of a system for the registration of external assessors and their supervision, which would be the responsibility of the European Securities and Markets Authority (ESMA).

New delegated act on taxonomy clarifies requirements for non-financial reporting

The European Commission has issued a delegated act supplementing Article 8 of the Taxonomy Regulation. This provision requires financial and non-financial companies to provide investors with information on the environmental impact of their assets and economic activities. The aim is to provide investors with clear and comparable information on the sustainability of financial products. The newly issued delegated act sets out the content, methodology and presentation of information on how much of the trading, investment or lending activities comply with the EU taxonomy.

Non-financial companies will have to disclose what proportion of their turnover and capital and operating expenses is linked to economic activities in line with the EU taxonomy. Financial institutions (in particular banks, investment firms and insurance companies) will be required to disclose the share of these activities in the total assets they finance or invest in.

European Central Bank: early adoption of green policies is in the interest of businesses and banks

The European Central Bank (ECB) has conducted a climate stress test, examining the impact of climate change on more than four million companies worldwide and 1,600 banks in the European Union. Climate risks include the physical risks directly arising from climate change (i.e. the risk of more severe and frequent natural disasters) and the risks associated with the transition to a climate-neutral economy (i.e. the costs associated with this transition).

The test results were clear: early adoption of policies to support the transition to a climate-neutral economy is in the interest of businesses and banks, taking into account both types of risks. The test showed that physical risks can have a negative impact on the creditworthiness of companies and the risk level of loan portfolios. Moreover, the ECB concluded that the short-term costs of the transition are minimal compared to the projected costs that these entities will have to incur in the medium and long term if climate change is not brought under control.

EU not doing enough to promote sustainable investment, the European Court of Auditors says

The European Court of Auditors (ECA) has issued a special report Sustainable finance: More consistent EU action needed to redirect finance towards sustainable investment, which concludes that the EU is currently not doing enough in the area of sustainable financing. According to the ECA, the Commission has rightly focused on increasing the transparency of sustainable activities and financial products, but at the same time, it has not come up with accompanying measures to help effectively address the environmental and social costs of unsustainable economic activities. The ECA further criticises the fact that many of the actions resulting from the Action Plan were implemented late.

In its special report, the ECA makes recommendations to the European Commission to promote sustainable investment more effectively. According to the ECA, it is primarily important to:

  • Finalise the Action Plan measures (in particular the EU taxonomy) and clarify the mechanisms for verifying compliance of investments with the taxonomy;
  • Contribute more effectively to sustainable financing by setting the prices of GHG emissions (and thus reflecting their environmental costs);
  • Consistently apply the ‘do no significant harm’ principle and comply with the taxonomy criteria across the EU budget.
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