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Sustainable Finance

Sustainable Finance 

In our regulatory section we have decided to include a topic that we have not addressed yet: "Sustainable Finance". Although it is a very broad topic, we will try, within few paragraphs, to summarize its substance, where it is heading for in terms of the banking regulation and, last but not least, some basic sources of information that can help those who directly deal with this topic in banks.

Introduction

In response to the adoption of the Paris Agreement on climate change and the UN 2030 Agenda for Sustainable Development in 2015 the governments around the world set strategies to comply with their commitments including those on sustainable finance.

Within the EU, the European Commission published the Final report of the High-Level Expert Group on sustainable finance on 31 January 2018 and, subsequently, on 8 March 2018 Action Plan on Financing Sustainable Growth (references to the relevant documents are provided at the end of the article).

Substance in a nutshell

The EU Action Plan of Financing Sustainable Growth provides an explanation of the concept of Sustainable finance:

“Sustainable finance generally refers to the process of taking due account of environmental and social considerations in investment decision-making, leading to increased investments in longer-term and sustainable activities. More specifically, environmental considerations refer to climate change mitigation and adaptation, as well as the environment more broadly and related risks (e.g. natural disasters). Social considerations may refer to issues of inequality, inclusiveness, labour relations, investment in human capital and communities. Environmental and social considerations are often intertwined, as especially climate change can exacerbate existing systems of inequality. The governance of public and private institutions, including management structures, employee relations and executive remuneration, plays a fundamental role in ensuring the inclusion of social and environmental considerations in the decision-making process.”

The EU Action Plan on sustainable finance aims to:

  1. Reorient capital flows towards sustainable investment in order to achieve sustainable and inclusive growth,
  2. Manage financial risks stemming from climate change, resource depletion, environmental degradation and social issues; and
  3. Foster transparency and long-termism in financial and economic activity.

Where are we heading for in terms of the banking regulation?

As part of its commitments on Sustainable finance, the EU has mandated the EBA to work on this topic, including:

  • to develop a monitoring system to assess material environmental, social and governance (ESG) risks,
  • to prepare a report on how to incorporate ESG risks into the supervisory review and evaluation process performed by competent authorities. The EBA’s report should cover:
    • the development of a uniform definition of ESG risks including physical risks and transition risks,
    • the development of criteria for understanding the impact of ESG risks on the financial stability of institutions in the short, medium and long terms,
    • the arrangements, processes, mechanisms and strategies to be implemented by the institutions to identify, assess and manage these risks, and
    • the analysis methods and tools to assess the impact of ESG risks on lending and the financial intermediation activities of institutions,
  • to develop a technical standard implementing the disclosure requirements included in CRR 2 on ESG risks,
  • to prepare a report on the prudential treatment of assets associated with environmental or social objectives.

In order to fulfil these mandates, the EBA has published its Action Plan on Sustainable Finance.

Basic information sources

For those directly dealing with Sustainable finance we have put together some basic sources of information. The list is barely exhaustive. The documents rather scratch the surface as many new ones are expected to come:

20-10-2020

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