Eu sustainable finance framework

Sustainable finance market – exponential growth until 2021

• First green bonds issued in 2007 (EIB) and 2008 (World Bank)

Two types of instruments

• Sustainability bonds/loans – proceeds specifically earmarked for sustainable investments (green/social) – activity based

• Sustainability linked bonds/loans – general corporate purposes, but tied to achieving sustainability KPIs – performance based

Sustainable finance market – first recorded decline in 2022 - Several factors behind the decline

• Tighter macroeconomic conditions (higher interest rates)

• The disappearing "green" premium of sustainable finance instruments

• Activist political and industry resistance to ESG in the US

• High-profile greenwashing fines and lawsuits (BNY Mellon, DB DWS)

• Stricter criteria for sustainable finance products due to stricter legislation (especially in the EU)

• Nevertheless, future market potential remains substantial.

Sustainable finance market drivers

Pull factors

• Issuers – operational benefits (risk reduction and increased efficiency) and market opportunities; emphasis on climate risks.

• Investors – sustainability related credit risks increasingly priced in; but markets are not fully efficient.

• Financial intermediaries – ESG information requirements & increasing demand for ESG (non-financial) reporting.

• Past: rise of competing sustainability reporting frameworks and standards

Future: convergence of sustainability reporting frameworks and standards

• Establishment of International Sustainability Standards Board in 2021 (IFRS Foundation)

• A 2-pillar solution: 1st pillar – investor-oriented standards (ISSB/IFRS); 2nd pillar - standards for a wider range of stakeholders
(GRI/GSSB).

• The leading role of the EU in shaping international standards has been recognized.

Push factors

• Blended finance approaches → de-risking private capital using public (budgetary) resources.

• Can leverage sustainable finance.

• Can blur responsibilities between public (fiscal) and private capital interests.

Policy commitmments – international agreements & EU strategies include specific commitments to mobilize finance for sustainability o
bjectives.

Arguments in favor of regulation of sustainable finance

• Why regulate? → market failures of sustainable finance market

• Externalities → cross-sectional and inter-generational (consequence: insufficient and not

fast enough transition to sustainable finance)

• Information asymmetries → what is sustainable and how to measure it?

• Systemic risk → orderly transition is in the interest of policy-makers

• Counter-arguments: costs of regulatory compliance and government failure

Legislative background of the EU taxonomy

• The EU taxonomy is based on two-tier EU legislation

• Taxonomy Regulation (EU) 2020/852 sets out environmental objectives and compliance criteria for defining environmentally sustainable
economic activities. It also imposes an obligation on companies to disclose information in accordance with taxonomy in the context of non-
financial reporting.

• Delegated regulations for different taxonomy objectives set out more detailed technical screening criteria for checking compliance with the EU
taxonomy. They are meant to be 'living documents'. To date, Delegated Regulation (EU) 2021/2139 on climate objectives has been formally
adopted.

• Delegated Regulation (EU) 2021/2178 further specifies the content and form of taxonomy disclosures under non-financial reporting by
companies.
Basic objectives and possible uses of sustainability disclosures
• The basic objective of sustainability disclosures is to establish a continuous flow of reliable and comparable qualitative and quantitative
information regarding sustainability aspects of business on company level, similar to financial reporting.
• Possible uses include strategic corporate decisions, risk management, investment decisions, product and service design, changing practice of
supervisory authorities and changing economic polities.