Sustainable Finance: the EU enters the final stretch

31 March 2023 - Foreword of the week - By : Anuschka HILKE

Elections of the European Parliament are coming up in June 2024 and will be followed by the renewal of the Commission. Hence, there are only a few months left to finalize the implementation of the renewed sustainable finance strategy adopted in 2021. This strategy aims, among other things, to increase the contribution of the financial sector to sustainability. It seems too early to already draw conclusions on how the Commission delivered on its objectives as some key legislative and supervisory processes are still under way. This newsletter focusses on some of these ongoing processes that receive quite some attention in the public debate

 

The first one is about climate stress tests. In early March, the European Commission launched a new climate stress testing exercise covering the entire European financial system. While it is not the primary focus of such exercises, I4CE has looked into the impact on transition financing. This report published today shows that, to date, while they have had some undeniably interesting co-benefits for banks and supervisors, this impact has been limited. And it is likely to remain so in the future.

 

What about the obligation for banks to have climate transition plans? After having introduced in the Corporate Sustainability Reporting Directive an obligation to companies, including financial institutions, to publish Climate transition plans, European legislators are negotiating the revision of the Capital Requirements Directive (CRD) and the introduction of a Corporate Sustainability Due Diligence Directive (CSDDD). Two directives that also talk about climate transition plans. Taken together, all these directives can make a difference. But they have to be consistent with each other. This is what you will find out in our latest OpEd by Romain Hubert. 

 

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To learn more
  • 02/16/2024 Foreword of the week
    Mobilising banks in the transition: supervisors must have better use of risk management

    The European Union is continuing its efforts to ensure that the banking system takes climate change into account. Banks will have to draw up a “transition plan”, according to the European Banking Authority’s (EBA) guidelines that are out for consultation until April.  One could hope that the banking authorities would seize this opportunity to encourage banks to better finance the transition, since their voluntary commitments are not sufficient. But the EBA does not make it a clear objective.

  • 02/14/2024
    Connecting the dots between climate risk management and transition finance

    A report to clarify linkages between these two approaches to climate action for the financial sector. The mobilization of the sector is necessary to help to finance the low-carbon transition. Some stakeholders thus advocate the explicit mobilization of the sector in favor of financing the transition. This rationale for action is known as the “transition finance approach”. The sector is also exposed to the financial risks arising from climate change and the necessary transition. This observation motivates a rationale for action known as te “risk approach”, aimed at managing the exposure of financial institutions to such risks.

  • 01/26/2024 Foreword of the week
    Failing to plan is planning to fail: Prudential transition plans and European Banking Authority consultation

    After nearly 4 years of negotiations, the European Union has just reached an agreement to reform the Capital Requirements Directive (CRD) for banks. The inclusion of climate change is a major step forward: banks will have to draw up prudential transition plans, supervised by the European Central Bank. These plans will complement the European regulatory architecture that is being put in place for large companies, with the Sustainability Reporting Directive (CSRD) and the Due Diligences Directive (CSDD). Are these banking transition plans a sufficient breakthrough to finally commit banks to climate neutrality? The answer to this question will depend on the implementation of EU legislation.

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