RESULTS AND SCORES

European Union

Enabling Environment

The EU provides a strong enabling environment for financial systems to become supportive of the goals in Paris climate accord. In particular the introducti- on of a green taxonomy could become a game chan- ger to greening financial systems. The publication of the first full set of taxonomy criteria is expected for June 2019. The EU has already established a com- prehensive incentive framework for green finance particular through EIB and EBRD.
The European enabling environment could be strengthened by the ECB taking a role model posi- tion on climate-related disclosure on its own portfolios. The EU should consider climate change in all investment decisions and make them compliant with the goals in the Paris accord. Once established, the green taxonomy should translate into free green labels.

Supervision, Risk Management & System Stability

The supervisory bodies on the EU-level progress on integrating climate-related risks in their activities
and requirements. In 2019, ECB has identified climate-related risks as a key risk in its EU-wide risk assessment for the first time. The recently agreed new banking package, i.e. Capital Requirements Directive (CRD V) / Capital Requirements Regulation (CRR II), mandates EBA to prepare reports on integrating environmental, social and governance (ESG) risks into the supervisory process and prudential treatment of assets. Consultation for technical advice of the European Insurance and Occupational Pensions Autho- rity (EIOPA) on integrating sustainability risks and factors into Solvency II and delegated acts is on-going. The draft report entails various explicit references to climate change related risk together with reasoning why they should be included explicitly. Further development of IORP II is expected based on legislative proposals of EU Commission of 2018, in particular optionality of ESG consideration based on Art. 19 (investment rules)may be revised.
Furthermore, climate risks are part of the recently launched EU-wide stress test for pension funds. ESMA has run a consultation on integrating sustainability aspects for asset managers. The report published on 3rd May 2019 proposes that asset managers consider sustainability risks and sustainability factors as part of their governance and risk management requirements (UCITS and AIF). Results on the ESMA consultation on integrating sustainability aspect in ratings are expec- ted by July 19.

Transparency and Disclosure

Transparency efforts by the European Commission have unfolded through the publication of the report on climate-related disclosure and the upcoming integration in the non-binding guidelines of the non-financial reporting directive. Through the report, the recommendations by the Task Force on Climate-Related Financial Disclosure (TCFD) are introduced to a substantial degree, probably the most extensive translation into a legal framework so far. Furthermore, the European Securities and Markets Authority (ESMA) is in the process of updating the Markets in Financial Instruments Directive II (MIFID II) to integrate sustainability risks into risk assessment and management as well as governance structures and consumer preferences.
On the EU-level, further progress should be sought on consumer transparency. The development of the EU-Ecolabel and the green taxonomy should become key elements of further progress. Particular areas of work could involve increasing retail fund transparency and inclusion of cli- mate-related aspects in Packaged Retail and Insurance-based Investment Products (PRIIPs).

  • ENABLING ENVIRONMENT

    The EU provides a strong enabling environment for financial systems to become supportive of the goals in Paris climate accord. In particular the introduction of the EU sustainable taxonomy could become a game changer to greening the financial system. In June 2019, the European Commission’s Technical Expert Group on Sustainable Finance (TEG) has published the first set of taxonomy criteria. The TEG is expected to finalise their recommendations on the EU sustainable taxonomy by February 2020. The EU has already established a comprehensive incentive framework for green finance in particular through EIB and EBRD. The recent update of the EIB lending policy marks a turning point for the financing of energy projects as most fossil fuels will be excluded. This change could become a role model for lending / financing policies by other institutions. The European enabling environment could be strengthened by the ECB taking a role model position on climate-related disclosure on its own portfolios. The EU should consider climate change in all investment decisions and make them compliant with the goals in the Paris accord. Once established, the EU sustainable taxonomy should be translate into free green labels.

  • SUPERVISION, RISK MANAGEMENT AND SYSTEM STABILITY

    The supervisory authorities on the EU-level progress on integrating climate-related risks in their activities and requirements. In 2019, ECB has identified climate-related risks as a key risk in its EU-wide risk assessment. The recently agreed new banking package (CRD V and CRR II), mandates EBA to prepare a report to the Commission by end of June 2022 on integrating environmental, social and governance (ESG) risks into the supervisory process. The Supervisory Authority EIOPA has contributed to implementation of the action plan by providing (1) “Technical Advice on the integration of sustainability risks and factors in the delegated acts under Solvency II and IDD” and by providing an (2) “Opinion on Sustainability within Solvency II” (September 2019). In its technical advice, EIOPA proposes to explicitly add sustainability risks next to emerging risks within the regulation. Further development of IORP II is expected based on legislative proposals of EU Commission of 2018, in particular optionality of ESG consideration based on Art. 19 (investment rules) may be revised. Furthermore, EIOPA's Pensions stress test 2019 (launched in April 2019) includes an assessment of ESG exposures for the first time. This includes climate change related risks in the sector. Results are due in December 2019.

  • TRANSPARENCY AND DISCLOSURE

    Transparency efforts by the European Commission have unfolded through the publication and communication of the non-binding guidelines on reporting climate-related information. Through the non-binding guidelines, the recommendations by the Task Force on Climate-Related Financial Disclosure (TCFD) are introduced to a substantial degree. The non-binding guidelines are a supplement to the Non-Financial Reporting Directive (NFRD). The European Commission will review the NFRD in 2020 and work on an update. In this process, the non-binding guidelines will probably become a part of the updated NFRD. The European Securities and Markets Authority (ESMA) is in the process of updating the Markets in Financial Instruments Directive II (MIFID II) to integrate sustainability risks into risk assessment and management as well as governance structures and consumer preferences. At the EU-level, further progress should be sought on consumer transparency. The development of the EU-Ecolabel and the EU sustainable taxonomy should become key elements of further progress.

Transparency and Disclosure

Common disclosure framework58%
58%
Investor's fiduciary duties57%
57%
Consumer transparency50%
50%

Supervision, Risk Management & System Stability

Supervisory authority positioning75%
75%
Regulation/Supervision of banks48%
48%
Regulation /Supervision of insurance companies60%
60%
Regulation /Supervision of pension funds80%
80%
Regulation /Supervision of asset management and investment funds50%
50%
Regulation/Supervision of rating agencies50%
50%

Enabling Environment

Green common taxonomy60%
60%
Supporting green finance with public incentives75%
75%
2-Degree consistency of public sector acting63%
63%
Public capacity building and awareness on green finance40%
40%

The European Union (EU) achieves the relatively good results on all three dimensions of the 3fP-Tracker. However, as with all countries and regions considered, there is still ample room for improvement for EU regulatory financial environment to become truly ‘fit for Paris’. In particular, while being in the process of implementing sustainable finance proposals, actual financial regulation and policies still require further improvement to support the transition to a low-carbon economy through and by the financial sector.

The 3fP-Tracker assessment shows that the EU is making substantial progress on translating the EU Action Plan on Sustainable Finance into legislation. Publications and/or translation into regulation of the EU sustainable taxonomy, climate benchmark & ESG disclosure for benchmarks, the EU Green Bond Standard and non-binding guidelines on climate-related disclosure are drafted or have already become regulation. Major EU institutions such as the European Central Bank (ECB) and the European supervisory authorities, the European Banking Authority (EBA), the European Insurance and Occupational Pensions Authority (EIOPA) and the European Securities and Markets Authority (ESMA) have stepped up efforts on integrating climate-related and sustainability risks into their supervisory activities. Strong enabling activities by the European Investment Bank (EIB), i.e. with an updated lending policy, and by the European Bank for Reconstruction and Development (EBRD) provide fertile ground for green finance at the European level.

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