RESULTS AND SCORES

European Union

Enabling Environment
Supervision, Risk Management & System Stability
Transparency and Disclosure
Enabling Environment

The EU provides a strong enabling environment for financial systems to become supportive of the Paris climate goals. On 22 June 2020, the Taxonomy Regulation (TR)  2020/852 was published in the Official Journal of the European Union and entered into force on 12 July 2020. On 9 March 2020, the TEG had published its final report on the EU Taxonomy. The report contains recommendations relating to the overarching design of the EU Taxonomy, as well as extensive implementation guidance on how companies and financial institutions can use and disclose against the EU Taxonomy. As part of the Taxonomy Regulation, the Commission was tasked with coming forward with technical screening criteria (through ‘delegated acts’) to develop the taxonomy further. The first two sets were published in a draft delegated on November 20, which is now open for feedback. It concerns those activities that substantially contribute to climate change mitigation or climate change adaptation.

The EU has already established a comprehensive incentive framework for green finance particularly 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 from the end of 2020. This change could become a role model for lending and financing policies by other institutions. In November 2020, EIB published its Climate Banks Roadmap, stating that every project seeking support by EIB has to pass an evaluation on climate change impacts. 

The European enabling environment could be strengthened by the ECB taking a role model position on climate-related disclosure of its own portfolios. The EU should consider climate change in all investment decisions and make them compliant with the goals in the Paris Agreement as part of the Multiannual Financial Framework (MFF) and the recovery programme NextGenEU.

Supervision, Risk Management & System Stability

The ESAs are in the process of integrating climate-related risks in their activities and supervisory requirements. In 2019, ECB has identified climate-related risks as a key risk in its EU-wide risk assessment. The recently agreed new banking packages (CRD V and CRR II), mandates EBA to prepare a report to the Commission by 28 June 2021 on integrating environmental, social, and governance (ESG) risks into the supervisory process. In December 2019 EBA published its “EBA Action Plan on Sustainable Finance”, describing its activities and mandates related to ESG factors and ESG risks. 

EIOPA has contributed to implementation of the EU 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.  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 were published in December 2019 and it turned out that only a minority of 30% already have processes in place to manage ESG.  .

ESMA has been running a formal consultation on sustainability risks and factors in the UCITS and AIF directives as requested by the EU Commission. Its final report was published on 3 May 2019. Its technical advice proposes explicit reference to sustainability risks in governance and risk management requirements.  In November 2020, ESMA launched a Consultation Paper on Draft advice to European Commission under Article 8 of the Taxonomy Regulation.

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 was going to review the NFRD in 2020 and work on an update, but due to the COVID 19 pandemic this has been postponed to the first quarter of 2021 . In this process, the non-binding guidelines will probably become a part of the updated NFRD.

In November 2019 the EU adopted the Regulation (EU) 2019/2088 on sustainability-related disclosure in the financial sector (SFDR), which will come into effect in March 2021. The SFDR requires financial market participants and financial advisors to disclose policies on the integration of sustainability risks in investment decision-making process and in insurance advice.

The European Securities and Markets Authority (ESMA) continues 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. Since April 2019´s final report only one amendment to the regulation has been made, which did not take sustainability risks into account

At the EU-level, further progress should be sought on consumer transparency. The development of the EU Ecolabel framework for financial products, linked to the EU Taxonomy,  is expected for Q3 2021 and should become key elements of further progress.

  • ENABLING ENVIRONMENT

    The EU provides a strong enabling environment for financial systems to become supportive of the Paris climate goals. On 22 June 2020, the Taxonomy Regulation (TR) 2020/852 was published in the Official Journal of the European Union and entered into force on 12 July 2020. On 9 March 2020, the TEG had published its final report on the EU Taxonomy. The report contains recommendations relating to the overarching design of the EU Taxonomy, as well as extensive implementation guidance on how companies and financial institutions can use and disclose against the EU Taxonomy. As part of the Taxonomy Regulation, the Commission was tasked with coming forward with technical screening criteria (through ‘delegated acts') to develop the taxonomy further. The first two sets were published in a draft delegated on November 20, which is now open for feedback. It concerns those activities that substantially contribute to climate change mitigation or climate change adaptation.

    The EU has already established a comprehensive incentive framework for green finance particularly 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 from the end of 2020. This change could become a role model for lending and financing policies by other institutions. In November 2020, EIB published its Climate Banks Roadmap, stating that every project seeking support by EIB has to pass an evaluation on climate change impacts.

    The European enabling environment could be strengthened by the ECB taking a role model position on climate-related disclosure of its own portfolios. The EU should consider climate change in all investment decisions and make them compliant with the goals in the Paris Agreement, as part of its Multiannual Financial Framework (MFF) and the recovery programme NextGenerationEU

  • SUPERVISION, RISK MANAGEMENT AND SYSTEM STABILITY

    The ESAs are in the process of integrating climate-related risks in their activities and supervisory requirements. In 2019, ECB has identified climate-related risks as a key risk in its EU-wide risk assessment. The recently agreed new banking packages (CRD V and CRR II), mandates EBA to prepare a report to the Commission by 28 June 2021 on integrating environmental, social, and governance (ESG) risks into the supervisory process. In December 2019 EBA published its “EBA Action Plan on Sustainable Finance”, describing its activities and mandates related to ESG factors and ESG risks.

    EIOPA has contributed to implementation of the EU 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. 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 were published in December 2019 and it turned out that only a minority of 30% already have processes in place to manage ESG.

    ESMA has been running a formal consultation on sustainability risks and factors in the UCITS and AIF directives as requested by the EU Commission. Its final report was published on 3 May 2019. Its technical advice proposes explicit reference to sustainability risks in governance and risk management requirements. In November 2020, ESMA launched a Consultation Paper on Draft advice to European Commission under Article 8 of the Taxonomy Regulation.

  • 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 was going to review the NFRD in 2020 and work on an update, but due to the COVID 19 pandemic this has been postponed to the first quarter of 2021 . In this process, the non-binding guidelines will probably become a part of the updated NFRD.

    In November 2019 the EU adopted the Regulation (EU) 2019/2088 on sustainability-related disclosure in the financial sector (SFDR), which will come into effect in March 2021. The SFDR requires financial market participants and financial advisors to disclose policies on the integration of sustainability risks in investment decision-making process and in insurance advice.

    The European Securities and Markets Authority (ESMA) continues 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. Since April 2019´s final report only one amendment to the regulation has been made, which did not take sustainability risks into account.

    At the EU-level, further progress should be sought on consumer transparency. The development of the EU Ecolabel framework for financial products, linked to the EU Taxonomy, is expected for Q3 2021 and should become key elements of further progress.

Transparency and Disclosure

Common disclosure framework65%
65%
Investor's fiduciary duties70%
70%
Consumer transparency40%
40%

Supervision, Risk Management & System Stability

Supervisory authority positioning90%
90%
Regulation/Supervision of banks43%
43%
Regulation /Supervision of insurance companies60%
60%
Regulation /Supervision of pension funds73%
73%
Regulation /Supervision of asset management and investment funds50%
50%
Regulation/Supervision of rating agencies50%
50%

Enabling Environment

Green common taxonomy90%
90%
Supporting green finance with public incentives77%
77%
2-Degree consistency of public sector acting68%
68%
Public capacity building and awareness on green finance50%
50%

The European Union (EU) achieves relatively good results on all three dimensions of the finance fit for Paris (3fP) – Policy Tracker. However, as with all countries and regions considered, there is still room for improvement for the EU regulatory financial environment to become truly ‘fit for Paris’. In particular, while being in the process of implementing sustainable finance frameworks, the  upcoming Renewed Strategy on Sustainable Finance can further improve 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 Financing Sustainable Growth into EU legislation. The EU Taxonomy, climate benchmarks & 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 (ESAs), i.e. 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 and guidelines. 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 Paris-aligned finance at the European level.

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Glossary

Main bodies of the European Union

European Commission

The European Commission is the EU’s politically independent executive arm. It is alone responsible for drawing up proposals for new European legislation, and it implements the decisions of the European Parliament and the Council of the EU.

Additional ressources:

European Parliament

The European Parliament is the EU’s law-making body. It is directly elected by EU voters every 5 years.

European Council

The European Council brings together EU leaders to set the EU’s political agenda. It represents the highest level of political cooperation between EU countries.

European financial regulatory authorities

European Central Bank (ECB)

The European Central Bank (ECB) is the central bank for the euro and administers monetary policy within the Eurozone, which comprises 19 member states of the European Union and is one of the largest monetary areas in the world. Established by the Treaty of Amsterdam, the ECB is one of the world’s most important central banks and serves as one of seven institutions of the European Union, being enshrined in the Treaty on European Union (TEU).

The primary objective of the ECB, mandated in Article 2 of the Statute of the ECB is to maintain price stability within the Eurozone. Its basic tasks, set out in Article 3 of the Statute, are to set and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and operation of the financial market infrastructure under the payments system and the technical platform (currently being developed) for settlement of securities in Europe. The ECB has, under Article 16 of its Statute, the exclusive right to authorise the issuance of euro banknotes.

It is the central bank of the Republic of Italy; it is regulated by national and European legislation and it is an integral part of the Eurosystem. It pursues price stability and the stability and efficiency of the banking/financial system, thus implementing the principle of the protection of savings set forth in the Italian Constitution.

It is the central bank of the Republic of Italy; it is regulated by national and European legislation and it is an integral part of the Eurosystem. It pursues price stability and the stability and efficiency of the banking/financial system, thus implementing the principle of the protection of savings set forth in the Italian Constitution.

Additional ressources:

European Banking Authority (EBA)

The European Banking Authority (EBA) is an independent EU Authority which works to ensure effective and consistent prudential regulation and supervision across the European banking sector. Its overall objectives are to maintain financial stability in the EU and to safeguard the integrity, efficiency and orderly functioning of the banking sector.

The main task of the EBA is to contribute, through the adoption of binding Technical Standards (BTS) and Guidelines, to the creation of the European Single Rulebook in banking. The Single Rulebook aims at providing a single set of harmonised prudential rules for financial institutions throughout the EU, helping create a level playing field and providing high protection to depositors, investors and consumers.

The Authority also plays an important role in promoting convergence of supervisory practices to ensure a harmonised application of prudential rules. Finally, the EBA is mandated to assess risks and vulnerabilities in the EU banking sector through, in particular, regular risk assessment reports and pan-European stress tests.

Additional ressources:

European Insurance and Occupational Pensions Authority (EIOPA)

EIOPA’s core responsibilities are to support the stability of the financial system, transparency of markets and financial products as well as the protection of policyholders, pension scheme members and beneficiaries. EIOPA is commissioned to monitor and identify trends, potential risks and vulnerabilities stemming from the micro-prudential level, across borders and across sectors.

Additional ressources:

European Securities and Markets Authority (ESMA)

ESMA works in the field of securities legislation and regulation to improve the functioning of financial markets in Europe, strengthening investor protection and co-operation between national competent authorities. The idea behind ESMA is to establish an “EU-wide financial markets watchdog”. One of its main tasks is to regulate credit rating agencies.

Additional ressources:

European Systemic Risk Board (ESRB)

The European Systemic Risk Board (ESRB) was established in 2010 to oversee the financial system of the European Union (EU) and prevent and mitigate systemic risk

Other key financial actors

Technical Expert Group on Sustainable Finance (TEG)

The European Commission set up a Technical expert group on sustainable finance (TEG) to assist it in developing, in line with the Commission’s legislative proposals of May 2018

  • an EU classification system – the so-called EU taxonomy – to determine whether an economic activity is environmentally sustainable;
  • an EU Green Bond Standard;
  • methodologies for EU climate benchmarks and disclosures for benchmarks; and
  • guidance to improve corporate disclosure of climate-related information.

The TEG commenced its work in July 2018. Its 35 members from civil society, academia, business and the finance sector, as well as additional members and observers from EU and international public bodies work both through formal plenaries and sub-group meetings for each work stream. The work of the TEG has been officially extended until year-end 2019. Due to the need to allow the TEG to conclude its technical work and retain the expertise before the future Platform on sustainable finance is set up, the TEG has been further extended until 30 September 2020.

European Investment Bank (EIB)

The European Investment Bank is the lending arm of the European Union. We are the biggest multilateral financial institution in the world and one of the largest providers of climate finance.

Additional ressources:

European Local Energy Assistance (ELENA)

ELENA is a joint initiative by the EIB and the European Commission under the Horizon 2020 programme. ELENA provides grants for technical assistance focused on the implementation of energy efficiency, distributed renewable energy and urban transport programmes.

The grant can be used to finance costs related to feasibility and market studies, programme structuring, business plans, energy audits and financial structuring, as well as to the preparation of tendering procedures, contractual arrangements and project implementation units.

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