EU regulatory activities in the sustainable finance sector

Numerous regulatory initiatives have been launched relating to sustainable and green finance. The most prominent and arguably the most important initiative is the European Commission’s “Action Plan on Financing Sustainable Growth” published in March 2018.

Numerous regulatory initiatives have been launched relating to sustainable and green finance. The most prominent and arguably the most important initiative is the European Commission’s “Action Plan on Financing Sustainable Growth” published in March 2018. This Action Plan has three main objectives: 

  • Channelling private capital into sustainable investments to bridge the funding gap for achieving climate targets
  • Strengthening the financial system by including risks relating to climate change and social imbalances in the risk management process
  • Increasing the transparency and long-term orientation of the financial sector.

As part of the Action Plan, the European Commission published various regulatory proposals in spring 2018, including a regulation to create a “taxonomy” for environmentally sustainable economic activities and oblige institutional investors to disclose sustainable investments and sustainability risks.  

Timeframe „Action Plan on Financing Sustainable Growth“ Source: European Commission

Technical Expert Group on Sustainable Finance

The European Commission set up a Technical Expert Group on Sustainable Finance (TEG) to formulate detailed technical criteria which environmentally sustainable economic activities must meet. The TEG developed recommendations concerning important publications, requirements for sustainable benchmarks, green bond standards and technical criteria for environmentally sustainable economic activities relating to climate protection and adaptation to climate change

Source: European Commission

The building sector is among the environmentally sustainable economic activities that are generally in a position to make a substantial contribution to achieving climate targets. The TEG has developed criteria that must be met when constructing new buildings, renovating existing buildings or acquiring existing buildings. The criteria play an important role from the perspective of Pfandbrief banks, as the EU’s Green Bond Standards will be linked to fulfilment of the taxonomy criteria.

EU Green Bond Standards

A Green Bond only complies with the EU’s Green Bond Standards if it is used to finance environmentally sustainable economic activities that meet the taxonomy criteria. The recommendations also deal with project identification, framework definition, reporting and verification by third parties 
 

Key elements of the EU Green Bond Standard (Source: European Commission)

Green projects
  • Alignment with the environmental objectives and technical screening criteria as defined in the EU taxonomy
  • Phyical or financial assets, tangible or intangible: any capital expenditure and selected operatingependiture such as maintenance costs related to green assets that either increase the lifetime or the value of the assets, as well as researcg and development costs, and relevant public investments and public subsidies for sovereign and sub-sovereigns
  • Green assets qualify without a lookback period, and eligible green operating expenditure shall qualify with a maximum of three years lookback
  • The use of proceeds is specified either in the prospectus or in the final terms of the bond
Green bond framework
  • Document explaining issuer's alignment with the EU taxonomy and environmental objectives, green bond strategy, project selection, methodologies and processes for allocation and impact reporting of the Green bond or Green Bond program
  • The issuer must produce it when confirming the alignment with the EU GreenBonds standard
Reporting
  • Allocation and Impact reporting become mandatory
  • Allocation report needs to be published annually until full allocation of the bond proceeds, and Impact report at least once at the full allocation, and both reports thereafter, in case of any material change
Verification
  • Issuers shall appoint an external verifier that needs to be accredited
  • Verification applies (i) to the Green Bond Framework and (ii) to the Allocation Reporting