EU regulations in the field of "green" banking and finance are aimed at creating a framework to support sustainable development, environmental friendliness, combating global warming and increasing transparency of financial companies. Let's look at the main ones.
What is "sustainable" finance?
"Sustainable" or "green" finance can be defined as a set of financial activities that focus on the public interest in the long term. They include three basic principles: sustainability, solidarity and responsibility.
"Green finance refers to financial activities that aim to be environmentally friendly, to switch to renewable energy sources, and to prevent damage to the environment. Through a series of regulations and rules, the EU obliges financial companies to comply with the basic principles of sustainable development and stimulates and encourages private investment in green production. In direct connection with this, solidarity and responsibility imply the obligations of financial companies to society, for example, the provision of all social guarantees.
The most important event in the development of the green economy was the Paris Agreement, which was signed in 2015 and affected, among others, the banking and financial sectors. This agreement commits all countries to minimize CO2 emissions by 2100 and to curb global warming to below 2°C compared to pre-industrial levels.
"Green Pact for Europe"
In December 2019, the European Commission presented the Green Deal for Europe, a carefully crafted strategy for the transition to a climate-neutral and sustainable economy by 2050. In addition to preventing climate change, biodiversity loss and pollution, the strategy offers a model for economic growth and an opportunity for equitable development for every EU citizen.
The European Commission announced that a huge amount of money - 1,000 billion dollars - would need to be invested to implement the Green Deal. It was calculated that the funding would be mainly provided through a multi-year program for 2021-2027 and a series of funds. However, state aid would not be enough, so the EU also stated the need for parallel financing and incentives from the private sector, especially banks and financial organizations. This requires offering appropriate conditions and incentives, which is why the EU has been gradually amending legislation and implementing new investment initiatives over the past years. In 2023, this policy led to many green initiatives, and the European Green Bonds Standard (EU GBS) issued in the same year set the requirement that 85% of the funds raised must be invested in sustainable development.
How are banks integrating these green requirements?
Despite encouragement from EU bodies and increased private banking initiatives, the integration of sustainability and green principles is still in its infancy. Nevertheless, in recent years, an increasing number of banks have been working to improve their governance structures by setting up dedicated teams to integrate ESG (environmental, social and corporate governance) principles within the company.While some banks already offer ESG-related products and services, including green project finance and mortgages for energy efficiency projects, not all of them are yet integrating ESG principles into all products and services. The integration of ESG risks into risk modeling is also in its infancy. Banks need to make further efforts to improve their quantitative approaches and recognize the importance of ESG risks in the long term.
The same is true for European supervisory authorities. While most of them recognize the importance of considering the environmental and social impacts of banking activities, there is still disagreement on whether ESG risks should be considered as the main type of risk or as one of its factors. In addition, there are still no clear quantitative indicators to measure ESG risks.
The main regulations in the field of sustainable finance are:
- Regulation (EU) 2019/2088 of the European Parliament and of the Council of November 27, 2019 on "Disclosure of sustainability information in the financial services sector". It requires financial market participants to publish information related to environmental impact on their resources.
- Regulation (EU) 2020/852 of the European Parliament and of the Council of June 18, 2020 establishing a framework for the promotion of sustainable investment and amending Regulation (EU) 2019/2088.
- European Directive Directive (EU) 2022/2464, which controls non-financial reporting by European organizations, as well as the Corporate Sustainability Reporting Directive (CSRD), which is being phased in from January 1, 2024.
Other regulations were amended to implement sustainability criteria, including:
- Benchmarks Regulation: in 2019, two new categories of low-carbon indices are introduced: the Climate Transition Benchmarks (CTB) and Paris Aligned Benchmarks (PAB).
- MIFID II Directive: from 2022, intermediaries offering portfolio management services are required to ascertain their clients' sustainability preferences before offering them financial investments
- AIFMD and UCITS Directive: These acts require all UCITS management companies and all alternative fund managers, regardless of their investment strategy to integrate sustainability risks into the fund management.
A clear trend towards the integration of sustainability and green principles in the banking sector can thus be seen. To date, banks in Europe cannot boast of a deep integration of green solutions into their operations, but thanks to private initiative as well as incentives from EU supervisory authorities, this process will deepen.
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