EU Sustainable Growth Financing Action Plan: What's behind it? 

The EU Commission published the Action Plan on Financing Sustainable Growth in 2018. The aim: to redirect capital flows towards sustainable investments, to manage financial risks from climate change and social problems, and to promote transparency and long-termism in financial and economic activity.

The Action Plan includes four adaptation efforts:

• an EU classification system,
• the concretisation of investor obligations,
• two new categories for benchmarks and
• the integration of sustainability aspects into financial advice.

The EU Commission has issued the Sustainable Finance Action Plan in the form of binding rules.

CSR Directive Implementing Act: What banks have to consider and what is changing

Since 2017, banks with more than 500 employees have had to disclose information on environmental, social and labour issues, human rights, and anti-corruption and anti-bribery, according to the CSR Directive.

The CSR Directive is currently being further developed: On 21 April 2021, the EU Commission published the draft revision of the EU Corporate Sustainability Reporting Directive (CSRD; NFRD, Non-Financial Reporting Directive). The group of reporting entities will be expanded and the option to publish a separate sustainability report will be eliminated. The CSRD is to be implemented in national law by 1 December 2022 and apply from the 2023 financial year. As of this date, all sustainability reports will also be subject to an external audit requirement.

In 2020, the EU Taxonomy was adopted to create a uniform classification with clear definitions for ESG risks and sustainability. The EU Taxonomy is part of the Green Deal and aims to make Europe climate neutral by 2050. The EU Commission will gradually establish technical assessment criteria in delegated acts. The final delegated act on the environmental objectives of climate change mitigation and adaptation was published in July 2021 and will apply from 01.01.2022.

European regulation places a strong focus on the disclosure of information on sustainability.

An important regulation in this context is the Sustainable Finance Disclosure Regulation (SFDR), which was adopted on 27 November 2019 and obliges financial market participants and financial advisors to disclose more data on sustainability from 10 March 2021. The Joint Regulatory Technical Standards on ESG disclosure standards for financial market participants of the three European Supervisory Authorities (ESA) concretise the disclosure obligations under the SFDR.

On 1 March 2021, the EBA (European Banking Authority) published its guidelines on the disclosure of environmental, social and governance risks (ESG risks) in accordance with Art. 449a in conjunction with 434a of the Capital Requirements Regulation (CRR II) for consultation. These are to be applicable from 28.06.2022 and ensure transparent disclosure of sustainability risks of banks and their handling of these risks. Disclosure according to Pillar 3 is to take place every six months.

The European and national supervisory authorities devote extensive attention to dealing with sustainability risks.

ECB Guidance on Climate and Environmental Risks (final version, November 2020) The European Central Bank (ECB) developed a guidance document on climate and environmental risks to enable the major institutions to adequately address these risks in their risk management systems. This guide provides guidance to the significant institutions on how to incorporate climate and environmental risks into their governance and risk management structures and consider them when defining their business strategy. Furthermore, institutions should disclose these risks transparently to the markets.

EBA Guidelines on loan origination and monitoring (EBA/GL/2020/06, in force since 30 June 2021) The final report states that institutions should specifically include risks associated with ESG factors in their credit risk appetite and management strategies, as well as in their credit risk policies and procedures. They should also fix qualitative and quantitative targets to encourage environmentally sustainable lending. The borrower's risks associated with ESG factors should be taken into account in the lending decision.

EBA Report on management and supervision of ESG risks for credit institutions and investment firms (version June 2021) The EBA Report on management and supervision of ESG risks for credit institutions and investment firms requires banks to establish plans to manage climate risks over a strategic time horizon of 10 years. ESG risks must be integrated into business strategy and risk management. Credit institutions should demonstrate how ESG risks can be managed and how resilient they are in different scenarios. The EBA report proposes the Portfolio Alignment Method, the Risk Framework Method with climate stress tests and the Exposure Method as methods for measuring ESG risks.