EU Targets Finance for $415-Billion-a-Year Green Transition

(Bloomberg) -- The European Union proposed a swathe of new rules to bring the world of finance in line with its ambitious goal to make the region carbon neutral by the middle of the century.

The European Commission wants tighter measures on banks and credit rating agencies to better reflect the risks climate change poses to the financial system. The bloc also set out its green bond standard, a voluntary rulebook that issuers of sustainable debt will have to abide by should they want the EU stamp of approval.

The Sustainable Finance Strategy marks a step up in the bloc's push to combat “greenwashing,” where the environmental benefits are overstated, as it seeks to regulate the 350 billion euros-a-year ($415 billion) it needs in energy investment. It comes a week ahead of the Commission's Fit for 55 package setting out how to achieve a new emissions-cutting goal of at least 55% by 2030 from 1990 levels.

“There's only one lane on this road and its heading toward the sustainable agenda, to climate neutrality,” said Mairead McGuinness, the European commissioner for financial services, in a briefing with reporters. “Greenwashing is very visible. You can do it once and reputations are ruined off the back of it.”

The new initiatives will be a test for banks, which have preached the need to shun dirty investments, yet have frequently been accused by green groups of not doing enough. The EU too is under the spotlight, given it claims the new rules will set the “gold standard” globally, yet the door is still open for the possible inclusion of natural gas and nuclear power under its criteria for green investments.

The EU's rules add to an ever-expanding number of standards globally, as policy makers catch up to an exploding ethical debt market now worth over $3 trillion. The U.K. announced its own framework for the categorization of green gilts last week ahead of at least 15 billion pounds ($21 billion) of planned sustainable bond sales this fiscal year.

Those rules exclude nuclear power, something McGuinness said she had taken note of, while also emphasizing the need for there to be a global effort to categorize what is sustainable. She said that the EU needed to guard against the risks associated with the transition to a more sustainable economy, with the bloc considering an “intermediate taxonomy” that would allow so-called transition bonds.

The EU's strategy includes:

• A voluntary “Green Bond Standard”, with project spending linked to the EU's taxonomy for what counts as green and what doesn't
• Sovereign issuers will have some flexibility, such as the ability to use state auditors and an exemption from having to demonstrate project-level EU taxonomy alignment
• External reviewers will have to register with the European Securities Markets Authority; issuers will have to publish a “green bond factsheet” and publish yearly reports after the security has been issued
• The “Sustainable Finance Strategy” will use the ESMA to publish its findings on how ESG is incorporated into credit ratings by the second quarter of next year in an effort to boost transparency
• The EU needs a green capital markets union, said Valdis Dombrovskis, commissioner for economy and trade

The EU itself is set to become the biggest issuer of green debt globally, including 30% of its 800-billion-euro pandemic recovery funding, to start this year. While they will be aligned as closely as possible to the bloc's own standards -- ready for use in 2022 -- they will initially be chalked up against the widely-used principles from the International Capital Market Association.

“Climate change is a risk to financial stability,” McGuinness said at a press conference Tuesday. “There is no time to waste. The dramatic effects of climate change are already being felt.”

Lending Exposure

For European banks, the EU proposed incorporating climate-related risks into capital requirements. The challenge for lenders is weaning themselves off their lending exposure to fossil fuels.

Their initial disclosures have been limited and the European Central Bank says commercial lenders still have “patchy” data regarding their exposure to climate change. The ECB is prodding banks to tackle that deficiency and will hold a stress test next year to see how their balance sheets may fare as the climate and economy shifts.

The Club of Rome said the EU's strategy didn't go far enough and lacked urgency, focusing too much on instilling better cooperation without tangible steps.

“While this strategy sets out a positive vision of the reform needed in the financial system to support the European economy, the mechanisms proposed don't quite match up,” Sandrine Dixson-Decleve, co-president of the Club of Rome, said in a statement.

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