Regulatory Activities in the Sustainable Finance Sector

There are currently numerous regulatory initiatives relating to sustainable and green finance on both a national and international level. The most prominent and arguably the most important initiative is the European Commission’s “Action Plan on Financing Sustainable Growth” published in March 2018.

EU Commission Green Deal

In mid-December 2019, the new von der Leyen Commission presented its Green Deal. This is a set of policy initiatives to enable Europe to reach the target of net zero emissions by 2050. Central to this is a budget to promote measures to increase energy efficiency in the building sector.

Taxonomy

As part of the “Action Plan on Financing Sustainable Growth”, the EU Commission published three main objectives in spring 2018:

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

In mid-December 2019, the Commission, the European Parliament and the Council reached a trilogue agreement on the taxonomy for environmentally sustainable economic activities and on disclosure obligations for institutional investors relating to sustainable risks and investments. This, together with the Technical Expert Group recommendations published in mid-March 2020 regarding the technical implementation of taxonomy regulation, means that key objectives in the Commission’s action plan for sustainable growth have been implemented. The recommendations are intended to support investors, companies, issuers and project sponsors with the transition to a low-carbon, resilient and resource-efficient economy.

The taxonomy defines criteria (referred to as “technical screening criteria”) for economic activities that:

  • substantially contribute to one of the six environmental objectives (climate change mitigation, climate change adaptation, water protection, circular economy, containment of environmental pollution and preservation of biodiversity);
  • do no significant harm (DNSH) to the other five objectives;
  • comply with minimum safeguards (e.g. the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights).

Six enviromental goals

Source: “Taxonomy: Final Report of the TEG on Sustainable Finance”, EU Commission, March 2020

Three technical screening criteria

The three criteria make it easier for companies, project sponsors and issuers to access green financing and to improve their environmental performance. They also assist in determining which activities are already environmentally friendly. They will thus help to promote low-carbon sectors and de-carbonise high-carbon sectors.

Source: “Taxonomy: Final Report of the TEG on Sustainable Finance”, EU Commission, March 2020

In particular, environmentally sustainable economic activities that would in principle be able to make a substantial contribution to climate change mitigation include the building sector, which currently accounts for at least 40% of CO2 emissions. 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 complies with the EU’s Green Bond Standards only if it is used to finance environmentally sustainable economic activities that meet the taxonomy criteria. Moreover, the recommendations include points on project identification, framework definition, reporting and verification by third parties.

European Climate Law

On 4 March 2020, the EU Commission submitted a draft for the European Climate Law, in order to enshrine in law the EU’s political commitment to be climate-neutral by 2050. The European Climate Law fixes the target as 2050 and sets the course for all EU climate policy, creating the necessary planning security for authorities, companies and citizens.

EBA Action Plan on Sustainable Finance

In its Action Plan on Sustainable Finance, the European Banking Authority (EBA) describes its approach and timetable for fulfilment of EBA mandates relating to environmental, social and governance factors (ESG). The Action Plan explains the EBA’s sequential approach, from key indicators, strategies and risk management through to scenario analysis and evidence of any risk weight adjustment. The Action Plan also substantiates the EBA’s expectations that institutions will deal with ESG risks proactively and will not wait until supervisory regulations have been adopted.

Source: EBA Action Plan on Sustainable Finance, December 2019

BaFin Guidance Notice

The German supervisory authority wants to progressively incorporate sustainability risks into institutions' risk management. In December 2019 the authority published the final draft of the Guidance Notice on Dealing with Sustainability Risks. The Guidance Notice constitutes a compendium of “good practices” and offers motivation for those institutions yet to deal with the issue. Currently, no supervisory measures are attached to the requirements formulated therein.

Federal Government Sustainable Finance Advisory Committee

In June 2019, the federal government appointed an advisory committee for sustainable finance. The advisory committee is to advise the federal government on the drafting and implementation of its sustainable finance strategy, consolidate existing expertise, promote dialogue between relevant stakeholders and develop specific recommendations for action to strengthen Germany’s financial and economic position in the long term. The committee comprises representatives from industry, civil society and science as well as from various federal ministries. European and international initiatives will be taken into account as much as ongoing work in the federal government on federal investment strategy.

Avoiding Excess Regulation

The fact that various supervisory and political bodies are addressing the issue of sustainability simultaneously and independently of one another is liable to lead to a proliferation of regulation. If the financial sector is to make an effective contribution to climate change mitigation, a consistent, systematic and appropriate regulatory framework for sustainable financial products is needed. To achieve this, stronger harmonisation among the various institutions and organisations is imperative, and regulation should be limited to what is absolutely necessary.