- to support investors in identifying green bonds and relying on their quality;
- to facilitate the issuance of higher-quality green bonds, by providing definitions of the environmentally sustainable economic activities and projects to which the proceeds are to be allocated;
- to standardise external review activities and improve the reliability of external reviewers by introducing a voluntary registration and supervision regime.
In practical terms, the proposal provides for:
- the use of the proceeds of green bond issuance to finance (or refinance) certain eligible activities, including certain financial assets;
- an obligation for issuers of green securities to draw up an information sheet (factsheet) setting out, among other things, how the proceeds will be used and which activities can be financed. This factsheet will be reviewed by an external reviewer, who will verify its compliance with the requirements of the European Green Bond Standard;
- an obligation for issuers to draw up an annual report on the allocation of the issuance proceeds, which must also be submitted to an external reviewer for scrutiny;
- an obligation for issuers to prepare a report, according to a predefined template, on the environmental impact resulting from the use of the proceeds.
European supervisory authorities have also entered the field. The first significant intervention was that of the European Banking Authority (EBA) which, at the end of 2019, published the ‘Action Plan on Sustainable Finance’: important because it outlines a road map for applying sustainability principles at European level, defining the areas (medium- to long-term strategy and risk management; transparency; scenario analysis and stress testing; prudential treatment) on which banks should concentrate their attention.
The documents
In 2021, the EBA promoted the publication of two important documents.
The first is an ‘opinion’ on the so-called ‘key performance indicators’ (KPIs) and the related methodology for the disclosure by financial institutions of information on how and to what extent their activities qualify as environmentally sustainable. In the document the EBA proposes the Green Asset Ratio (GAR), accompanied by other performance indicators, which identifies the assets that finance sustainable activities in line with the European Green Deal and the objectives of the Paris Agreement.
The second document is a report on the management and supervision of ESG risks for credit institutions and investment firms.
It is an important paper for several reasons: it provides a definition of ESG risk; it outlines the impact that ESG factors can have on the counterparties or invested assets of financial institutions, with a consequent effect on financial risks; it describes the available quantitative and qualitative indicators, metrics and assessment methods needed for the effective management of ESG risks; and it recommends that financial institutions integrate ESG risks into their business strategies, objectives and governance structures, as well as develop methodologies and approaches to test their long-term resilience to ESG risks.
For its part, European Central Bank (ECB) Banking Supervision conducted a climate risk stress test in 2021. More than 4 million non-financial companies worldwide and 1,600 euro area banks were involved. The aim was to estimate the impact on operators of the costs linked to disasters and the energy transition over the next 30 years.
The results
The results of the test are in some ways striking. Companies located in regions highly exposed to the risk of natural disasters, and those in energy-intensive, high-CO2 sectors, could be up to four times more exposed to climate risk than the average company.
The even more important finding, however, is that in the medium and long term the benefits of a timely transition outweigh the short-term costs arising from the reduction in carbon emissions needed to move towards a zero-emission economy.
