The latest developments in sustainable finance & ESG

Robert A

Robert Adamczyk
ESG co-coordinator and focal point at ESD, member of the EU Platform on Sustainable Finance as well as member of TNFD

The latest developments in sustainable finance & ESG

On 21 April 2021 the EU Commission adopted an ambitious and comprehensive package of measures to help improve the flow of money towards sustainable activities across the EU. The aim is to enable investors to re-orient investments towards more sustainable technologies and businesses, these measures will be instrumental in making Europe climate neutral by 2050.

It is recognised that sustainability reporting is essential for the development of modern capital markets and transition that the Bank supports. We are seeing an increase of regulatory scrutiny and a gradual shift of global financial flows towards sustainable investment alongside societal pressure that are steadily driving the sustainability agenda forward. A key question is of course how to avoid greenwashing and ensure there is a clear definition on what is Green and apply the Taxonomy definition of Significant Contribution (SC) and Do No Significant Harm (DNSH) concept. In light of this, the international business community is increasingly incorporating environmental, social and governance (ESG) considerations into their policies, practices and reporting.

Effective corporate ESG integration is vital for risk management and the identification of new business opportunities as countries move towards net zero economies. It also aims at increasing financial actors' awareness and transparency about the need to mitigate ESG risks via an appropriate risk management, considering in particular the longer-term nature of such risks and the uncertainty on their valuation and pricing.

In this context, the EU is systemically implementing the sustainable finance action plan and this is an ongoing process aimed to develop a full comprehensive regime to report disclosures and focus capital flows into Green activities over the next few years.

The recent EU package is comprised of:

  • The EU Taxonomy Climate Delegated Act aims to support sustainable investment by making it clearer which economic activities most contribute to meeting the EU's environmental objectives. It creates a common language that investors can use when investing in projects and economic activities that have a substantial positive impact on the climate and the environment. It will also introduce disclosure obligations on companies and financial market introduces the first set of technical screening criteria to define which activities contribute substantially to two of the environmental objectives under the Taxonomy Regulation: climate change adaptation and climate change mitigation, a further four environmental objectives are under development which include: The sustainable use and protection of water and marine resources, The transition to a circular economy, Pollution prevention and control, The protection and restoration of biodiversity and ecosystems. All of which are covered by the Bank’s Environmental and Social Policy (ESP).
  • A proposal for a Corporate Sustainability Reporting Directive (CSRD). This proposal aims to improve the flow of sustainability information in the corporate world. It will make sustainability reporting by companies more consistent, so that financial firms, investors and the broader public can use comparable and reliable sustainability information. The Commission’s proposal for a Corporate Sustainability Reporting Directive embeds the concepts of the TCFD more clearly into EU legislation. Combined with the proposed EU standards, it would in effect make the TCFD mandatory. In the future emphasis will be placed on higher biodiversity disclosure akin to the French reporting article 29 and work currently being undertaken under the Task Force for Nature Related Financial Disclosure (TNFD). Nature-related financial disclosure will be a challenge in the future but essential to ensure we protect biodiversity.
  • Finally, six amending Delegated Acts on fiduciary duties, investment and insurance advice will ensure that financial firms, e.g. advisers, asset managers or insurers, include sustainability in their procedures and their investment advice to clients.

A cornerstone of this is the CSRD, which updates the 2014 Non Financial Disclosure Reporting Directive (NFRD) and brings together the work being undertaken under the EU Taxonomy. The corporate sustainability reporting directive requires large EU “public interest” corporates (including many financial services firms) to publish data on the impact their activities have on ESG factors. The Taxonomy Regulation introduces a sustainability classification system through which investment firms must classify investments based on CSRD data (and other datasets). The Sustainable Finance Disclosure Regulation (SFDR) (as supplemented by the Taxonomy) further requires some entities to disclose:

  • The environmental sustainability of an investment and the provenance of any ESG claims made
  • The risks investments present to ESG factors
  • The risks ESG factors present to investments

Through the synergy and interlinks of these frameworks, the EU is developing a structured ESG framework by requiring non-financial disclosures (CSRD) and offering:

  • The Taxonomy Regulation and its further extension as standardized definitions
  • Sustainable Finance Disclosure Regulation (SFDR) as standardized processes.
  • An EU Ecolabel for sustainability funds

Overall these measures form part of a broader suite of ESG initiatives to channel investments to environmentally and socially beneficial activities, avoiding green and social washing, far beyond the geographical boundary of the EU, thus facilitating compliance with Paris Agreement climate targets and with the UN’s 2030 Agenda for Sustainable Development. The aim is to fully implement the disclosure requirements over the next two years with specific work also being developed on transition financial and social taxonomy.

Many of our clients in the financial and corporate sectors will face a challenge to implement these requirements, and we note that the SFRD is also already effective mandatory for much of the financial sector.

For the Bank this is an opportunity to help its clients and countries of operations with this transition towards sustainability reporting and development of good corporate practices. Experts from GECA and ESD are involved in the discussions and development of the EU Taxonomy. A cross-departmental team from CDM, ESD and LTT/OGC are developing guidelines for Polish stock exchange companies on ESG disclosures. Special thanks go to Vesselina Haralampieva, Jacek Kubas, ESD GET team and Carel Cronenberg for their support and dedication.

In line with these developments, the Bank’s ESP includes references to DNSH and our GET 2.1 will reflect the EU Taxonomy. ESG reporting is already embedded in principle in our ESP and will be further strengthened in the future to remain reflective of international best practices. In the future we will not only require clients to disclose ESG reports, but we may need to start collecting data to enable future EBRD disclosure and reporting in line with best practice. Although as an international institutions we are currently exempt. The CSRD will require mandatory disclosure of all ESG issues by our clients. This is a very challenging and fast-evolving space to watch.

To raise awareness and help colleagues navigate through these complex developments, we plan to assist our clines in Ukraine.

Some useful links:

 Author: Robert Adamczyk, is the ESG co-coordinator and focal point at ESD, he is member of the EU Platform on Sustainable Finance as well as member of TNFD. He is also a member of Climate Disclosure Standards Board ((CDSB) Land Use and Biodiversity Working Group, and the UN Convention on Migratory Species (CMS) Energy Task Force (UN CMS ETF).

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