The European Central Bank will focus its 2022 bank stress tests on climate risks
Towards the end of 2021, two important EU taxonomy implementing regulations were published in the Bulletin of the European Union. These include a set of technical screening criteria regarding climate and a delegated act executing Article 8 of the Taxonomy Regulation, which specifies the requirements for non-financial reporting. Despite significant delays, these regulations came into force at last, and the first obligations arising from them can therefore become effective in 2022. Another document worth mentioning is a new study of the European Commission, which revealed that the income from ecological tax and environmental fees in the EU is insufficient. Even the European Central Bank plans to focus on climate risk – it will be one of the major topics of bank stress tests in 2022.
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The EU Taxonomy Climate Delegated Act brings the first set of technical screening criteria concerning the climate
The EU taxonomy has been a hot topic recently. It is a classification system and a tool for transparency, the purpose of which is to help determine economic activities, which can be considered as environmentally sustainable. The aim is to make sure there is greater transparency in the area of sustainable investments and prevent greenwashing. The EU taxonomy consists of directives on establishing a framework for the simplification of sustainable investments and the related implementing regulation, which specify this taxonomy regulation.
When can an economic activity be considered environmentally sustainable?
Pursuant to the Taxonomy Regulation, such activity has to meet the following conditions:
- Significantly contributes to one or more environmental goals, which are defined by the Taxonomy Regulation.
- Does not significantly harm any of the defined environmental goals.
- Respects international administration and management principles.
- Respects technical screening criteria.
The fact whether the first two requirements are satisfied should be assessed based on the technical screening criteria.
The first set of screening criteria for mitigating and adapting to the climate change (i.e. two of the six environmental goals defined in the Taxonomy Regulation) came into force in the form of a delegated act on 1 January 2022. It is an extensive catalogue of activities, which defines two basic conditions:
- The activity significantly contributes to the mitigation of or adaptation to the climate change.
- The activity does not significantly damage the remaining environmental goals.
For clarity purposes, the economic activities are classified according to individual industries (forestry, transport, power industry, etc.). Nevertheless, the European Commission counted on the fact that the text of the climate delegated act may be impractical for the addressees (namely upon the issuance of a delegated act with regard to the remaining goals, and therefore prepared an application – the taxonomy compass guide, which enables easier search and is more user-friendly.
The delegated act to Article 8 of the Taxonomy Regulation specifies the requirements for non-financial reporting
In addition to the climate-delegated act, another taxonomy regulation, the delegated act executing Article 8 of the Taxonomy Regulation, was published in the European Bulletin towards the end of 2021. Article 8 of the Taxonomy Regulation and the related delegated act brings significant changes in non-financial reporting.
To date, only large businesses in the public interest are obligated to report selected non-financial information pursuant to the Non-Financial Reporting Directive (NFRD). Starting 2022, the non-financial reporting obligations will gradually be extended in line with Article 8 of the Taxonomy Regulation and the delegated act to Article 8. Newly, obliged entities will be classified into financial and non-financial businesses.
Reporting obligations of businesses pursuant to the updated NFRD
- Financial businesses will report the proportion of their assets related to the activities eligible for the EU taxonomy and later explicitly in accordance with the taxonomy.
- Non-financial businesses shall report their proportion on the turnover, capital expenditure and operating expenses from activities eligible for the EU taxonomy and later explicitly in accordance with the taxonomy.
From 2023, other obligations pursuant to the proposal of the Corporate Sustainability Reporting Directive (CSRD) should be added to those listed above. CSRD counts with the extension of the scope of obligatory entities and the reported information.
Although the new regulatory non-financial reporting framework has not been completed yet, it is important for the obliged entities to familiarise themselves with the new rules and start preparing for the fulfilment of new obligations.
The European Commission found out that applying the “Polluter Pays Principle” in the EU leaves much to be desired
The “Polluter Pays Principle” is the gist of the environmental policy of the EU. The principle is applied in the form of taxes, fees, emission credits and other economic tools for environmental protection. The European Commission had a study prepared in order to identify whether this principle is being adhered to. The subject of the study included external environmental costs related to various economic sectors (such as power engineering, industry or transport) in terms of their environmental impact (such as air and water pollution, greenhouse gas emissions or waste management). These expenses were subsequently compared to the income generated from environmental taxes, fees and other tools used in the relevant sectors.
The conclusion was clear: the expenses related to pollution and environmental damage greatly exceed the income from economic tools for environmental protection. As a result, these expenses are carried by the companies of the member states.
Based on the above conclusions, the authors of the study from the Institute for European Environmental Policy have come up with suggestions regarding new economic tools, which would help member states apply the “Polluter Pays Principle” more consistently and increase the state budgets. These include e.g. the following tools:
- Environmental pollution: nitrogen tax, emission credits to reduce NH3 emissions from livestock production.
- Water pollution: pesticide tax, higher fees for wastewater discharge.
- Waste management: higher waste dump fees, PAYT system (pay as you throw).
Bank stress tests in 2022: the European Central Bank wants to put greater emphasis on climate risks
Every year, the European Central Bank (ECB) performs stress tests pursuant to Article 100 of the Capital Requirements Directive, based on which it examines the resistance of banks against financial and economic shocks. In 2022, these stress tests will focus on climate risks. Thus, the European monetary authority takes risks related to climate changes seriously and attaches great importance to them. The ECB dealt with the preparedness of European banks for climate changes already in 2021 and stated that none of the banks under ECB’s supervision fulfilled its expectations.
As part of the stress test, ECB will assess the banks’ procedures used in managing climate and environmental risks and will analyse how banks include such risks in their strategies. It will also focus on whether the banks take into consideration the physical impact of climate changes on the value of assets.