While linkages of the banking sector to climate change are manifold, the Paris Agreement (PA) merely generally refers to the financial sector in Article 2(1)(c). Subsequent Conferences of the Parties recognise the importance of private financial flows for climate change mitigation and adaptation. The EU banking sector has increasingly faced criticism for not adequately addressing the climate change impacts of its activities. Controversy exists on how to integrate climate change into the banking sector activities effectively and how to adapt the regulatory framework accordingly. The article discusses the potential roles and responsibilities of the private banking sector, banking supervisory authorities, and central banks in the EU regarding climate change mitigation and adaptation. It assesses whether and how these actors already contribute to the PA objectives and EU climate goals and which impediments and alternative options exist when pursuing these goals. On this behalf, it examines the EU’s obligations under the PA and the EU implementing measures regarding the banking sector. It discusses how the activities, tasks, and mandates of the different actors and the related regulatory framework may impact the achievement of the PA objectives. Finally, it proposes measures the EU banking sector may undertake but also points out necessary policy decisions to be adopted by the EU legislators to ensure the EU banking sector’s optimal contribution to achieving the PA objectives.
Views expressed in this paper are the authors’ and do not necessarily reflect those of the OeNB or the Eurosystem.
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Glasgow Climate Pact, Decision 1/CMA.3, 31.11.2021, FCCC/PA/CMA/2021/10/Add.1, preamble, 6th recital.
Intergovernmental Panel on Climate Change (IPCC) (2022), Climate Change 2022—Impacts, Adaptation and Vulnerabilities, IPCC Switzerland, at https://www.ipcc.ch/report/ar6/wg2/.
Article 4(1) Paris Agreement (PA), 12.12.2015, 3156 UNTS No. I-54113. See Kahl and Weller (2021). The European Green Deal, Communication from the Commission, 11.12.2019, COM (2019) 640 final.Cf. An EU-wide Assessment of the National Energy and Climate Plans, 17.09.2022, COM(2020) 564 final, p. 13.
Solana (2021), pp. 51–54.Decision (EU) 2016/948 of the European Central Bank of 1 June 2016 on the Implementation of the Corporate Sector Purchase Programme (ECB/2016/16). This decision was taken to strengthen the passthrough of the Eurosystem’s asset purchases to the financing conditions of the real economy, and to provide further monetary policy accommodation and contribute to a return of inflation rates to levels below, but close to, 2% over the medium term. Under the CSPP specified Eurosystem central banks may purchase, inter alia, eligible corporate bonds from eligible counterparties in the primary and secondary markets, under specific conditions (Article 1). The eligibility criteria for the purchase of corporate bonds are outlined in Article 2, for the assessment of the credit quality requirements only credit assessment information provided by an external credit agency accepted by the Eurosystem is taken into account. For an explanation of the CSPP see, e.g., ECB (2016), The Corporate Bond Market and the ECB’s Corporate Sector Purchase Program, ECB Economic Bulletin 5/2016, pp. 20–24, at Economic Bulletin Issue No. 5/2016 (June 2016) (europa.eu).
Linklaters Sustainable Futures, Does the ECB’s Quantitative Easing Programme Fuel Climate Change? NGO ClientEarth Goes Back to Court after the Dismissal of its Claims, 17.02.2022, at https://sustainablefutures.linklaters.com/post/102hj1q/does-the-ecbs-quantitative-easing-programme-fuel-climate-change-ngo-clientearth; see also ClientEarth, Questions on Legality of ECB Lending Remain after Climate Case Ruling, Press Release, 03.12.2021, at https://www.clientearth.org/latest/press-office/press/questions-on-legality-of-ecb-lending-remain-after-climate-case-ruling/. ClientEarth withdrew its appeal after the ECB updated its policy to integrate climate change concerns into its CSPP, see ClientEarth Communications, 29.11.2022, https://www.clientearth.org/latest/latest-updates/news/we-re-withdrawing-our-lawsuit-against-the-belgian-national-bank/.
General Court, Case T-9/19, ClientEarth v EIB, Judgement of the General Court, 27.01.2021, ECLI:EU:T:2021:42, appealed on 06.04.2021, C-223/21 P; for a discussion see Grantham Research Institute on Climate Change and the Environment (ClientEarth v. European Investment Bank—European Union—Climate Change Laws of the World (climate-laws.org).
On this question see the CJEU, Case C-493/17, Weiss and Others, ECLI:EU:C:2018:1000, para. 71, referring to CJEU, Case C-62/14, Gauweiler and Others, ECLI:EU:C:2015:400, para. 66.
UN Framework Convention on Climate Change (UNFCCC), 9.5.1992, 1771 UNTS No. I-30822, p. 107. For details see Bodansky (2017), pp. 130–141 with further references.Kyoto Protocol to the UN Framework Convention on Climate Change, 11.12.1997, 2303 UNTS No. 30882, p. 162; for details see Bodansky (2017), pp. 160–208 with further references.
For a survey see Bodansky (2017), pp. 209–257; Van Calster and Reins (2021). For details see Van Calster and Reins (2021), pp. 79–81. Van Calster and Reins (2021), pp. 82–85. Van Calster and Reins (2021), pp. 97–98.Cf. UNFCCC Secretariat, Nationally Determined Contributions under the Paris Agreement, Synthesis Report by the Secretariat, 17.9.2021, FCCC/PA/CMA/2021/8, pp. 12–42; see also Van Calster and Reins (2021), pp. 120–124.
For a debate see Bodansky (2017), pp. 210–212; Van Calster and Reins (2021), p. 99, paras. 313–314; Voigt (2016).
For a discussion of this argument see Green (2014), pp. 15–19.See Warsaw ADP decision, UNFCCC Decision 1/CP.19, Further Advancing the Durban Platform, FCCC/CP/2012/10/Add.11, paras. 2(b) and (c); see also Green (2014), p. 23; Van Calster and Reins (2021), p. 99.
See Green (2014), p. 23; Van Calster and Reins (2021), para. 3.14. Bodansky (2017), pp. 19 and 213–214; see also Voigt (2016); critical Van Calster and Reins (2021).Cf. Article 31 Vienna Convention on the Law of Treaties (VCLT), 23.5.1969, 1155 UNTS No. 18232, p. 331; see also Van Calster and Reins (2021), pp. 78, paras. 2.13 and 2.14.
Voigt (2016), p. 18.Van Calster and Reins (2021), p. 99, para. 3.14; see also Green (2014); Rajamani (2016), pp. 497–502.
For details see Van Calster and Reins (2021), pp. 113–124; Voigt (2016), p. 18. Article 4(2) PA. Articles 4(3) and (9) PA. Articles 4(12) and (13) PA. See Articles 6, 13–15 PA; for details see Rajamani (2016), pp. 502–505; Bodansky (2017), pp. 19–20. Cf. Van Calster and Reins (2021), pp. 124–128.See Orakhelashvili (2019), p. 265; see also ILC Final Report, II YBILC 1966, p. 219; see also PA, preamble, 4th recital.
Cf. PA, preamble, 14th and 15th recital; see also UN, 2030 Agenda for Sustainable Development, A/RES/70/1, SDG No. 13.
Van Calster and Reins (2021), p. 126, para. 4.49; Bodansky (2017), pp. 42f and 45; Voigt (2016), p. 19.
Bodansky (2017), p. 45.1992 Rio Declaration on Environment and Development, A/Conf.151/26/Rev.1 (Vol. 1), Annex, Principle 2; see for details Boyle and Redgwell (2021), pp. 152–170, in particular pp. 163–167.
1992 Rio Declaration on Environment and Development, A/Conf.151/26/Rev.1 (Vol. 1), Annex, Principle 15; see for details Boyle and Redgwell (2021), pp. 170–183; Bodansky (2017), pp. 41–44.
See Articles 4.3, 4.4, and 11 UNFCCC, and Article 2(1)(c) PA. Bodansky (2017), pp. 137–140; for the KP: Article 11 KP, Bodansky (2017), p. 179. Bodansky (2017), p. 139.Bodansky (2017), p. 140, referring to Decision 2/CP.15, Copenhagen Accord, 30.03.2010, FCCC/CP/2009/11/Add.1, para. 8; see also Decision 1/CP.21, Adoption of the Paris Agreement, 29.01.2016, FCCC/CP/1015/10/Add. 1, para. 53.
Decision 1/CP.13, Bali Action Plan, 14.03.2007, FCCC/CP/2007/6/Add.1*, para. 1(e).Glasgow Climate Pact, Decision 1/CMA.3, 31.11.2021, FCCC/PA/CMA/2021/10/Add.1; Sharm el-Sheikh Implementation Plan, Revised draft decision, FCCC/CP/2022/L.19, at https://unfccc.int/sites/default/files/resource/cp2022_L19_adv.pdf.
UNFCCC Secretariat, Synthesis Report for the Technical Assessment Component of the First Global Stocktake, 20.04.2022, at https://unfccc.int/sites/default/files/resource/GST_SR_23d_MOI.pdf, paras. 5(iv) and (v), 7, and 147.
Cf. UNFCCC Secretariat, Synthesis Report for the Technical Assessment Component of the First Global Stocktake, 20.04.2022, at https://unfccc.int/sites/default/files/resource/GST_SR_23d_MOI.pdf, Figure 4 at p. 27.
UNFCCC Secretariat, Synthesis Report for the Technical Assessment Component of the First Global Stocktake, 20.04.2022, at https://unfccc.int/sites/default/files/resource/GST_SR_23d_MOI.pdf, para. 71.
Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action, OJ 2018 L 328/1; see also Declaration by the Union Made in accordance with Article 20(3) PA, at https://unfccc.int/files/focus/ndc_registry/application/pdf/xxvii-7d_european_union_ndc.pdf.
See UNFCCC, NDC Registry, at https://www4.unfccc.int/sites/NDCStaging/pages/Party.aspx?party=EUU.Cf. Article 4(19) PA; the EU’s submission is available at https://unfccc.int/sites/default/files/resource/HR-03-06-2020%20EU%20Submission%20on%20Long%20term%20strategy.pdf, see also Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action, OJ 2018 L 328/1, Article 15.
Republic of Austria, Federal Ministry of Sustainability and Tourism, Long-Term Strategy 2050—Austria, Vienna, December 2019, at https://unfccc.int/sites/default/files/resource/LTS1_Austria.pdf.
European Green Deal, Communication from the Commission, 11.12.2019, COM (2019) 640 final.Cf. Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action, OJ 2018 L 328/1, Article 3: Integrated National Energy Plans; Article 7: required finances and investments.
Regulation (EU) 2021/1119 of the European Parliament and of the Council of 30 June 2021 Establishing the Framework for Achieving Climate Neutrality and amending Regulations (EC) No 401/2009 and (EU) 2018/1999 (“European Climate Law”), OJ L 243, 9.7.2021, pp. 1–17.
E.g. Republic of Austria, Federal Ministry of Sustainability and Tourism, Long-Term Strategy 2050—Austria, Vienna, December 2019, at https://unfccc.int/sites/default/files/resource/LTS1_Austria.pdf, pp. 72–74 and 79; see also UNFCCC Secretariat, Synthesis Report for the Technical Assessment Component of the First Global Stocktake, 20.04.2022, at https://unfccc.int/sites/default/files/resource/GST_SR_23d_MOI.pdf.
Report of the European Commission’s High-Level Expert Group on Sustainable Finance, 31.01.2018, at https://ec.europa.eu/info/publications/180131-sustainable-finance-report_en.
Action Plan: Financing Sustainable Growth, Communication from the Commission, 8.3.2018, COM(2018) 97 final, at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52018DC0097&from=EN.
Strategy for Financing the Transition to a Sustainable Economy, Communication from the Commission, 6.7.2021, COM(2021) 390 final, at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021DC0390.
Regulation (EU) 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment and amending Regulation (EU) 2019/2088 (Taxonomy Regulation), OJ 2020 L 198/13, pp. 13–43.
ECB, ECB Presents Action Plan to Include Climate Change Considerations in its Monetary Policy Strategy, Press Release, 08.07.2021, at https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html. The ECB has decided on a comprehensive action plan and a roadmap to further incorporate climate change considerations into its policy framework.
UNFCCC Standing Committee on Finance, Report of the Standing Committee on Finance. Addendum. Mapping of available information relevant to Article 2, paragraph 1(c), of the Paris Agreement, including its reference to article 9 thereof (2022), FCCC/PA/CMA/2022/7/Add.4, pp. 5–13, at https://unfccc.int/documents/620484.
E.g., the Partnership for Carbon Accounting Financials, at https://carbonaccountingfinancials.com/. Task Force on Climate-related Financial Disclosures, at https://www.fsb-tcfd.org/.Financial Stability Board, FSB Roadmap for Addressing Climate-Related Financial Risks (2021), at https://www.fsb.org/wp-content/uploads/P070721-2.pdf.
Network of Central Banks and Supervisors for Greening the Financial System, at https://www.ngfs.net/en.
Basel Committee on Banking Supervision, Principles for the Effective Management and Supervision of Climate-related Financial Risk (June 2022), at https://www.bis.org/bcbs/publ/d532.pdf.
For information on the IPSF’s activities see International Platform on Sustainable Finance, Annual Report (2022), at https://finance.ec.europa.eu/system/files/2022-11/221109-ipsf-annual-report_en.pdf.
Joint Statement by the Founding Members of the Central Banks and Supervisors Network for Greening the Financial System (12.12.2017), at https://www.banque-france.fr/sites/default/files/medias/documents/joint_statement_-_greening_the_financial_system_-_final.pdf.
See., e.g., Task Force on Climate-related Financial Disclosures, at https://www.fsb-tcfd.org/.As one among many publications of the NGFS see, e.g., Network of Central Banks and Supervisors for Greening the Financial System, Enhancing market transparency in green and transition finance (April 2022), at https://www.ngfs.net/sites/default/files/medias/documents/enhancing_market_transparency_in_green_and_transition_finance.pdf.
Network of Central Banks and Supervisors for Greening the Financial System, Progress Report on the Guide for Supervisors (October 2021), at https://www.ngfs.net/sites/default/files/media/2021/11/08/progress_report_on_the_guide_for_supervisors.pdf.
Network of Central Banks and Supervisors for Greening the Financial System, NGFS Climate Scenarios for Central Banks and Supervisors (June 2021), at https://www.ngfs.net/sites/default/files/media/2021/08/27/ngfs_climate_scenarios_phase2_june2021.pdf.
Network of Central Banks and Supervisors for Greening the Financial System, Progress Report on Bridging Data Gaps (May 2021), at https://www.ngfs.net/sites/default/files/medias/documents/progress_report_on_bridging_data_gaps.pdf.
Network of Central Banks and Supervisors for Greening the Financial System, Guide on Climate-related Disclosure for Central Banks (December 2021), at https://www.ngfs.net/sites/default/files/medias/documents/guide_on_climate-related_disclosure_for_central_banks.pdf.
Network of Central Banks and Supervisors for Greening the Financial System, Adapting Central Bank Operations to a Hotter World: Reviewing Some Options (March 2021), at https://www.ngfs.net/sites/default/files/media/2021/06/17/ngfs_monetary_policy_operations_final.pdf.
European Parliament, Resolution of 16 February 2022 on the European Central Bank—Annual Report 2021 (2021/2063(INI)), at https://www.europarl.europa.eu/doceo/document/TA-9-2022-0029_EN.html.
ECB, ECB Presents Action Plan to Include Climate Change Considerations in its Monetary Policy Strategy, Press Release, 08.07.2021, at https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html.
UNFCCC Standing Committee on Finance, Summary by the Standing Committee on Finance of the Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows (2020), p. 3, at https://unfccc.int/sites/default/files/resource/54307_1%20-%20UNFCCC%20BA%202020%20-%20Summary%20-%20WEB.pdf.
Cf. UNFCCC Secretariat, Synthesis Report for the Technical Assessment Component of the First Global Stocktake, 20.04.2022, at https://unfccc.int/sites/default/files/resource/GST_SR_23d_MOI.pdf, Figure 4 at p. 27.
UNFCCC Standing Committee on Finance, Summary by the Standing Committee on Finance of the Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows (2020), p. 13, at https://unfccc.int/sites/default/files/resource/54307_1%20-%20UNFCCC%20BA%202020%20-%20Summary%20-%20WEB.pdf.
UNFCCC Standing Committee on Finance, Summary by the Standing Committee on Finance of the Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows (2020), p. 13, at https://unfccc.int/sites/default/files/resource/54307_1%20-%20UNFCCC%20BA%202020%20-%20Summary%20-%20WEB.pdf.
Carney M, Governor of the Bank of England and Chairman of the Financial Stability Board, Breaking the Tragedy of the Horizon—Climate Change and Financial Stability, Speech at Lloyd’s of London, 29.09.2015, at https://www.bis.org/review/r151009a.pdf.
Gourdel et al. (2022), Chapter 7.2.; the authors highlight the key role of investors’ anticipation of the impact of the carbon tax for smoothing the transition in the economy and finance.
The non-profit thinktank Carbontracker understands stranded assets as those assets that at some time prior to the end of their economic life are no longer able to earn an economic return as a result of changes associated with the transition to a low-carbon economy, e.g., lower than anticipated demand or prices. This leads to the assets being worth less than expected as a result of changes associated with the energy transition, see https://carbontracker.org/terms/stranded-assets/.
Scialom (2021), p. 197. Explained in more detail in Scialom (2021), pp. 197–198.Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on Access to the Activity of Credit Institutions and the Prudential Supervision of Credit Institutions and Investment Firms, OJ 2013 L 176/338, as amended.
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on Prudential Requirements for Credit Institutions and Investment Firms, OJ L 176/1, as amended. The CRR and CRD complement each other. The CRR represents the directly appliable body of rules maximally harmonized within the EU, the provisions of the CRD in general need to be transposed by MS into national law.
Depending on the specific activities undertaken, additional regulatory frameworks may apply, e.g., in the area of asset management, securities etc.
Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 Establishing a European Supervisory Authority (European Banking Authority), as amended, OJ 2010 L 331/12, Article 8(1)(a). Regulatory technical standards (RTS) in accordance with Article 290 TFEU need to be distinguished from implementing technical standards (ITS) in accordance with Article 291 TFEU. In the area of banking regulation, RTS serve to ensure the consistent harmonization of this area of the financial market. They must be “technical”, hence may not contain strategic decisions or policy choices, their content is limited by the legislative act on which they are based. ITS serve to determine the conditions of application of certain legislative acts. They must also be of a technical nature and may not contain strategic decisions or policy choices. See also Article 10–14 and 15 EBA Regulation; for details on the EBA Regulation see below.
Article 97 CRD.Basel Committee on Banking Supervision, Disclosure Requirements (2019), para. 10.1, at https://www.bis.org/basel_framework/standard/DIS.htm?type=all.
E.g., the law on stock corporations.Directive 2013/34/EU of the European Parliament and of the Council of 26 June 2013 on the Annual Financial Statements, Consolidated Financial Statements and Related Reports of Certain Types of Undertakings, amending Directive 2006/43/EC of the European Parliament and of the Council and repealing Council Directives 78/660/EEC and 83/349/EEC, OJ (2013) L 182/19.
Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards Disclosure of Non-financial and Diversity Information by Certain Large Undertakings and Groups, OJ 2014 L 330/1.
European Commission, Communication from the Commission—Guidelines on Non-financial Reporting: Supplement on Reporting Climate-related Information, OJ 2019 C 209/1. The Guidelines express the expectation to publish, inter alia, meaningful information and key metrics on climate-related and environmental risks.
Regulation (EU) 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment and amending Regulation (EU) 2019/2088 (Taxonomy Regulation), OJ 2020 L 198/13. The EU Commission adopted a delegated act to further specify the content, methodology, and presentation of the information to be disclosed, see Commission Delegated Regulation supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by Specifying the Content and Presentation of Information to be Disclosed by Undertakings Subject to Articles 19a or 29a of Directive 2013/34/EU Concerning Environmentally Sustainable Economic Activities, and Specifying the Methodology to Comply with that Disclosure Obligation, 06.07.2021, C(2021) 4987 final, at https://ec.europa.eu/finance/docs/level-2-measures/taxonomy-regulation-delegated-act-2021-4987_en.pdf.
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on Sustainability-related Disclosures in the Financial Services Sector, OJ 2019 L 317/1, to be read in conjunction with the Regulation (EU) 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment and amending Regulation (EU) 2019/2088 (Taxonomy Regulation), OJ 2020 L 198/13. The SFDR obliges manufacturers of financial products and financial advisers including banks to disclose the “principal adverse impacts” that investment decisions have on sustainability factors and the sustainability characteristics of financial products.
Climate risks can be viewed as a subset of ESG risk. The EBA defines ESG risks as “risks of any negative financial impact on the institution stemming from the current or prospective impacts of ESG factors on its counterparties or invested assets”, see EBA, EBA Report on Management and Supervision of ESG Risks for Credit Institutions and Investment Firms (2021), EBA/REP/2021/18, at https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2021/1015656/EBA%20Report%20on%20ESG%20risks%20management%20and%20supervision.pdf, p. 23.
Under Article 8 Taxonomy Regulation large undertakings that are required to publish non-financial information pursuant to the Non-Financial Reporting Directive (NFRD) have to disclose information to the public on how and to what extent their activities are associated with environmentally sustainable (“taxonomy-aligned”) economic activities.
European Commission, Proposal for a Regulation of the European Parliament and the Council on European Green Bonds, 6.7.2022, COM(2021) 391 final, at https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021PC0391.
Article 449a CRR, Article 98(8) CRD. The information required is further detailed in EBA Implementing Technical Standards (ITS) on Disclosures on Environmental, Social and Governance (ESG) Risks, in: EBA, Final Report, Final Draft Implementing Technical Standards on Prudential Disclosures on ESG Risks in accordance with Article 449a CRR, 24.01.2022, EBA/ITS/2022/01, at EBA draft ITS on Pillar 3 disclosures on ESG risks.pdf (europa.eu). The information shall be provided staggered over time. It includes comparable quantitative disclosures on climate-change-related risks, as well as information on exposures towards carbon-related assets and assets subject to chronic and acute climate change events, furthermore, quantitative disclosures on banks’ mitigating actions supporting their counterparties in the transition to a GHG-neutral economy and in the adaptation to climate change. In addition, a Green Asset Ratio (GAR), which identifies the banks’ assets financing activities that are environmentally sustainable according to the EU taxonomy must be disclosed. On related EBA activities see below.
Article 431 CRR. As provided by the Taxonomy Regulation and related technical standards.As provided for by the NFRD, the Taxonomy Regulation, prudential regulation, the Corporate Sustainability Reporting Directive (CSRD) (Directive of the European Parliament and of the Council amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting, PE-CONS 35/22, at https://data.consilium.europa.eu/doc/document/PE-35-2022-INIT/en/pdf), the work done by the European Financial Reporting Advisory Group (EFRAG), at https://www.efrag.org/ and, for financial products, the SFDR.
Existing risk categories include, e.g., credit, market, operational, reputational, legal and liquidity risks.
For a list of provisions of particular relevance in that respect and EBA Guidelines specifying these provisions see ECB, Guide on Climate-related and Environmental Risks (2020), at https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.202011finalguideonclimate-relatedandenvironmentalrisks~58213f6564.en.pdf, p. 8 and below.
For a discussion of these categories see, e.g., EBA, EBA Report on Management and Supervision of ESG Risks for Credit Institutions and Investment Firms (2021), EBA/REP/2021/18, at https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2021/1015656/EBA%20Report%20on%20ESG%20risks%20management%20and%20supervision.pdf, pp. 35–43. Physical risks arise from the physical effects of climate change and environmental degradation. Transition risks arise out of the uncertain timing of the adjustment to an GHG-neutral economy. A bank’s business model, operating environment, and risk profile determine whether such risks are relevant and influence the resulting regulatory requirements. In its report, the EBA provides steer on supervisory expectations, sets out common definitions of ESG risks and their transmission channels, and identifies evaluation methods that are needed for effective risk management.
Le Quang and Scialom (2021), pp. 3–7. Bolton et al. (2020), pp. 21–22. Coelho and Restoy (2022), pp. 4 and 7. Le Quang and Scialom (2021), p. 14.Network for Greening the Financial System, Capturing Risk Differentials from Climate-related Risks: A Progress Report (May 2022), at https://www.ngfs.net/sites/default/files/medias/documents/capturing_risk_differentials_from_climate-related_risks.pdf, and Network for Greening the Financial System, A Status Report on Financial Institutions’ Experiences from Working with Green, Non-green and Brown Financial Assets and a Potential Risk Differential (May 2020), at https://www.ngfs.net/sites/default/files/medias/documents/ngfs_status_report.pdf. The EBA also follows a cautious stance on adjustment factors for green and non-green exposures, see EBA, The Role of Environmental Risks in the Prudential Framework, Discussion Paper, 02.05.2022, EBA/DP/2022/02, at https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Discussions/2022/Discussion%20paper%20on%20the%20role%20of%20environmental%20risk%20in%20the%20prudential%20framework/1031947/Discussion%20paper%20on%20role%20of%20ESG%20risks%20in%20prudential%20framework.pdf, p. 45.
Coelho and Restoy (2022), p. 6.According to Article 501a CCR, such exposures shall entail reduced own funds requirements provided that they comply with a list of criteria including that the obligor has carried out an assessment whether the assets being financed contribute to the environmental objectives of climate change mitigation or adaption. However, a verification of this assessment is not required.
Recital 61 of Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the Leverage Ratio, the Net Stable Funding Ratio, Requirements for Own Funds and Eligible Liabilities, Counterparty Credit Risk, Market Risk, Exposures to Central Counterparties, Exposures to Collective Investment Undertakings, Large Exposures, Reporting and Disclosure Requirements, and Regulation (EU) No 648/2012, OJ 2019 L 150/1.
Le Quang and Scialom (2021), p. 16, with further references. Measures include climate risk-related stress-testing and disclosure requirements. Cited in D’Orazio and Popoyan (2022), p. 107.EU legislators currently negotiate amendments, see European Commission, Banking Package 2021: New EU Rules to Strengthen Banks’ Resilience and Better Prepare for the Future, Press Release, 27.10.2021, at https://ec.europa.eu/commission/presscorner/detail/en/IP_21_5401.
Article 104 CRD. Coelho and Restoy (2022), p. 2. Coelho and Restoy (2022), p. 2. Reghezza et al. (2021), p. 19.Commission Delegated Regulation supplementing Regulation (EU) 2019/2088 of the European Parliament and of the Council with regard to Regulatory Technical Standards Specifying the Details of the Content and Presentation of the Information in relation to the Principle of ‘Do No Significant Harm’, Specifying the Content, Methodologies and Presentation of Information in relation to Sustainability Indicators and Adverse Sustainability Impacts, and the Content and Presentation of the Information in relation to the Promotion of Environmental or Social Characteristics and Sustainable Investment Objectives in Precontractual Documents, on Websites and in Periodic Reports, 06.04.2022, C(2022) 1931 final, at https://ec.europa.eu/finance/docs/level-2-measures/C_2022_1931_1_EN_ACT_part1_v6%20(1).pdf, p. 2.
As an example, see, e.g., the exploration of the financial risks posed by climate change for the largest UK banks and insurers (published 24.05.2022), at https://www.bankofengland.co.uk/stress-testing/2022/results-of-the-2021-climate-biennial-exploratory-scenario, p. 12.
Communication from the Commission to the European Parliament, the European Council, the Council, the European Central Bank, the European Economic and Social Committee and the Committee of the Regions, Action Plan: Financing Sustainable Growth, 08.03.2018, COM(2018) 97 final, at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52018DC0097&from=EN, pp. 1–2.
Frequently called the “double materiality”. According to one definition, the “double materiality perspective” means that entities need to consider how sustainability issues affect their business and their own impact on people and the environment, see European Commission, Questions and Answers: Corporate Sustainability Reporting Directive Proposal, 21.04.2021, at https://ec.europa.eu/commission/presscorner/detail/en/QANDA_21_1806.
Alogoskoufis et al. (2021), p. 69.GFANZ was launched in April 2021 by Mark Carney, UN Special Envoy for Climate Action and Finance and the UK Prime Minister’s Finance Advisor for COP26, in collaboration with the UN’s Race to Zero and the COP26 Presidency. It acts as a forum for addressing pan-financial sector challenges associated with the net-zero transition.
The Glasgow Financial Alliance for Net Zero—Our Progress and Plan towards a Net-zero Global Economy (November 2021), at https://assets.bbhub.io/company/sites/63/2021/11/GFANZ-Progress-Report.pdf, p. 11.
Solana (2021) identified eight different types of climate-related claims, pp. 56–57.Greenwashing can be described as misleadingly attributing to an entity, a financial instrument, product or service certain sustainability-related characteristics that do not (to this extent) exist (e.g., mislabeling as “environmentally friendly” or underreporting of certain exposures).
ECB, Guide on Climate-related and Environmental Risks (2020), at https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.202011finalguideonclimate-relatedandenvironmentalrisks~58213f6564.en.pdf, expectation 13.3. Institutions are encouraged to contribute to climate-related goals and are also expected to provide comprehensive and meaningful information on it.
Regulation (EU) 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment and amending Regulation (EU) 2019/2088 (Taxonomy Regulation), OJ 2020 L 198/13, Article 8.
Reghezza et al. (2021), p. 18.UNFCCC Standing Committee on Finance, Summary by the Standing Committee on Finance of the Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows (2020), at https://unfccc.int/sites/default/files/resource/54307_1%20-%20UNFCCC%20BA%202020%20-%20Summary%20-%20WEB.pdf, p. 14.
The ESRB is responsible for the macroprudential oversight of the EU financial system and the prevention and mitigation of systemic risk. The ESRB, therefore, has a broad remit, covering banks, insurers, asset managers, shadow banks, financial market infrastructures, and other financial institutions and markets, see https://www.esrb.europa.eu/about/background/html/index.en.html.
Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 Establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC, OJ 2010 L 331/12 (EBA Regulation), Article 2. The supervisory authorities for insurance and occupational pensions institutions (EIOPA) and for the supervision of securities and markets (ESMA) and a joint committee are also part of the ESFS. However, in line with the focus of this article, their roles will not be illustrated.
Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 Establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC, OJ 2010 L 331/12, Article 2.
Article 4 CRD.Council Regulation (EU) No 1024/2013 of 15 October 2013 Conferring Specific Tasks on the European Central Bank Concerning Policies relating to the Prudential Supervision of Credit Institutions (SSM Regulation), OJ 2013 L 287/63, Article 1. To the extent that supervisory powers fall within the scope of the supervisory tasks conferred on the ECB, the ECB is considered the competent authority for participating SSM MS. This is generally the case for so-called significant institutions of a certain size, importance for the economy or cross-border activities. For so-called less significant banks, national banking supervisory authorities remain competent authorities (Article 6 (4) SSM Regulation).
Recitals 32 and 34, and Article 4(3) SSM Regulation.Recital 65 and Articles 25(1) and (2) SSM Regulation; for further discussion of these tasks see below Sect. 3.3.
Recital 80 and Article 8 SSM Regulation; cf. also infra Sect. 2.4.Article 1(3) EBA Regulation; see also Articles 8(1)(f) and 8(1a) EBA Regulation. The EBA is tasked, in consultation with the ESRB, with developing criteria, inter alia, for the identification and measurement of potential environmental-related systemic risk. Banks that may pose a systemic risk shall be subject to strengthened supervision (Article 23(1) EBA Regulation).
Article 32(2)(a) and (e) EBA Regulation. Article 29(1)(f) EBA Regulation.The Green Asset Ratio shows the proportion of assets that are environmentally sustainable and contribute substantially to the objectives of climate change adaptation or mitigation, or that enable another activity to substantially contribute to those objectives (EBA, Final Report, Final Draft Implementing Standards on Prudential Disclosures on ESG Risks in accordance with Article 449a CRR (24.01.2022), EBA/ITS/2022/01, at https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Draft%20Technical%20Standards/2022/1026171/EBA%20draft%20ITS%20on%20Pillar%203%20disclosures%20on%20ESG%20risks.pdf).
2° Investing Initiative, Taking the Plunge—A Stocktake of National Financial Sector Climate Alignment Assessments (November 2021), at https://2degrees-investing.org/wp-content/uploads/2021/11/PACTA-COP-Stocktake.pdf, pp. 6–9.
The core of such analyses would presumably not be performed by bank supervisors but rather other institutions. See e.g., Jachnik et al. (2019), p. 6, who calls for further efforts to track gross primary investment flows.
Articles 11, 12, and 13(5) and (6) PA. Alogoskoufis et al. (2021), p. 4.ECB/ESRB Project Team on Climate Risk Monitoring, Climate-related Risk and Financial Stability (July 2021), at https://www.esrb.europa.eu/pub/pdf/reports/esrb.climateriskfinancialstability202107~79c10eba1a.en.pdf, p. 36.
Alogoskoufis et al. (2021), p. 9. The results also show that for corporates and banks most at risk the impact is potentially very significant, especially in the absence of further climate policies. Climate change, thus, is seen as a major source of systemic risk, particularly for banks with portfolios concentrated in certain economic sectors and in specific geographical areas.
As a learning exercise, it was intended to help enhance data availability and quality and allow supervisors to better understand the stress-testing frameworks banks use to gauge climate risk. The output of the stress test exercise was integrated into the supervisory review and evaluation process (SREP) using a qualitative approach with no direct capital impacts envisaged.
ECB, Banks Must Sharpen their Focus on Climate Risk, ECB Supervisory Stress Test Shows, Press Release, 08.07.2022, at https://www.bankingsupervision.europa.eu/press/pr/date/2022/html/ssm.pr220708~565c38d18a.en.html. According to the test results, almost two-thirds of banks’ income from non-financial corporate customers stems from GHG-intensive industries. In many cases, banks’ “financed emissions” come from a small number of large counterparties. Credit and market losses in the short-term disorderly transition and physical risk scenarios amount to around EUR 70 billion on aggregate for the 41 banks in question. However, according to the ECB, this significantly understates the actual climate-related risk, as it reflects only a fraction of the actual hazard. The test results show that banks’ losses would be lower in an orderly transition scenario than after delayed action.
ECB, Walking the Talk (November 2022), at https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.thematicreviewcerreport112022~2eb322a79c.en.pdf. The ECB also published a set of positive examples how banks already incorporate climate risk considerations. See ECB, Good Practices for climate-related and environmental risk management (November 2022), at https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.thematicreviewcercompendiumgoodpractices112022~b474fb8ed0.en.pdf.
ECB, Supervisory Assessment of Institutions’ Climate-related and Environmental Risks Disclosures—Report on Banks’ Progress towards Transparent Disclosure of their Climate-related and Environmental Risk Profiles (March 2022), at https://www.bankingsupervision.europa.eu/ecb/pub/pdf/ssm.ECB_Report_on_climate_and_environmental_disclosures_202203~4ae33f2a70.de.pdf.
EBA, Final Report, Final Draft Implementing Standards on Prudential Disclosures on ESG Risks in accordance with Article 449a CRR (24.01.2022), EBA/ITS/2022/01, at https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Draft%20Technical%20Standards/2022/1026171/EBA%20draft%20ITS%20on%20Pillar%203%20disclosures%20on%20ESG%20risks.pdf. The draft ITS are based on Article 434a CRR, which mandates the EBA to specify uniform disclosure formats. The uniform formats are intended to convey sufficiently comprehensive and comparable information for users of that information to assess the risk profiles of institutions and their sustainable finance strategy.
Task Force on Climate-related Financial Disclosures, Final Report Recommendations of the Task Force on Climate-related Financial Disclosures, 15.07.2017, at https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf. The Task Force on Climate-related Financial Disclosures (TCFD) was created by the G20 Financial Stability Board. It has developed a framework to help public companies and other organizations more effectively disclose climate-related risks and opportunities through their existing reporting processes.
Articles 11, 13 and 14 PA.See also the NGFS Progress Report on Bridging Data Gaps (May 2021), at https://www.ngfs.net/sites/default/files/medias/documents/progress_report_on_bridging_data_gaps.pdf. A comprehensive view on banks’ exposures, especially in connection with loans extended to small and medium sized companies (SMEs) and sovereigns, will only be available once remaining data gaps have been addressed. The EBA Report on Management and Supervision of ESG Risks for Credit Institutions and Investment Firms (2021), at https://www.eba.europa.eu/sites/default/documents/files/document_library/Publications/Reports/2021/1015656/EBA%20Report%20on%20ESG%20risks%20management%20and%20supervision.pdf illustrates available indicators, metrics, and evaluation methods that are needed for effective ESG risk management and identifies remaining gaps and challenges on this front.
According to the UNFCCC Standing Committee on Finance, Summary by the Standing Committee on Finance of the Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows (2020), at https://unfccc.int/sites/default/files/resource/54307_1%20-%20UNFCCC%20BA%202020%20-%20Summary%20-%20WEB.pdf, p. 14, this is a common challenge for various financial actors.
See generally Ortiz (2009).Following Article 282(1) TFEU, the ECB and the national central banks shall constitute the European System of Central Banks (ESCB). The ECB and the national central banks of those MS whose currency is the euro constitute the Eurosystem.
Article 127(1) TFEU; see Arda (2010 [2004-]), pp. 127-5-6. Ioannidis et al. (2021), pp. 9–11.These instruments are based on various decisions, regulations and guidelines of the ECB. For an overview of the ECB’s instruments see https://www.ecb.europa.eu/mopo/implement/html/index.en.html.
Article 127(1) TFEU, see Arda (2010 [2004-]), pp. 127-7; Article 2 Protocol (Nr. 4) on the Statute of the European System of Central Banks and of the European Central Bank. According to Article 3 TEU, the Union shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress, and a high level of protection and improvement of the quality of the environment.
Article 2 Protocol (Nr. 4), Article 127 TFEU. See above in Sect. 3.3.1.Article 127 TFEU. Financial stability could also be a means of achieving the monetary policy objective of price stability.
Ioannidis et al. (2021), pp. 16–17.Ioannidis et al. (2021), p. 22, also pointing out that even then the ECB’s instruments must be employed to carry out its task of defining and implementing monetary policy, as the ECB may support only within the limits of its basic tasks under Article 127(2) TFEU and Article 3 of the Statute of the ESCB and of the ECB, p. 24.
Article 119(3) TFEU. Ioannidis et al. (2021), p. 15. Ioannidis et al. (2021), p. 14.Ioannidis et al. (2021), pp. 17–19. These institutions are mainly the Union legislators who express priorities through legal acts within their respective competencies and assume international obligations like the PA. Ioannidis also refers to the consistency clause (Article 7 TFEU) as an additional potential criterion for prioritization.
Schnabel I, From Market Neutrality to Market Efficiency, Speech, 14.6.2021, at https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210614~162bd7c253.en.html. She is, however, also acknowledging the question of how the ECB should operationalise its policy support to accelerate the green transition.
Article 282(3) TFEU; Article 7 Protocol (Nr. 4).European Parliament, Resolution of 16 February 2022 on the European Central Bank—Annual Report 2021 (2021/2063(INI)), at https://www.europarl.europa.eu/doceo/document/TA-9-2022-0029_EN.html.
According to Article 216(2) TFEU, international agreements concluded by the Union are binding upon the institutions of the Union.
Cf. the EU’s NDCs and further references at Sect. 2.3.European Parliament, Resolution of 16 February 2022 on the European Central Bank—Annual Report 2021 (2021/2063(INI)), at https://www.europarl.europa.eu/doceo/document/TA-9-2022-0029_EN.html.
Article 5 TEU, for details see Ioannidis et al. (2021), pp. 25–28. Ioannidis et al. (2021), p. 6. See below for a discussion on why this may be required from an economic perspective.ECB (2021), p. 140, with reference in this context to Case C-493/17, Weiss and Others, ECLI:EU:C:2018:1000, para. 53; Case C-62/14, Gauweiler and Others, ECLI:EU:C:2015:400, para. 46.
According to ECB (2021), p. 140, this is because indirect effects in other policy fields are permitted according to the case law of the CJEU, specifically, e.g., Case C-62/14, Gauweiler and Others, ECLI:EU:C:2015:400. Still, such measures need to observe the general principles of EU law.
ECB (2021), p. 141, referring to Article 11 TFEU and case law. ECB (2021), p. 142. Bolton et al. (2020), p. 65. ECB (2021), pp. 6–10. See also the above discussion of the mandate of the ECB.Carney M, Governor of the Bank of England and Chairman of the Financial Stability Board, Breaking the Tragedy of the Horizon—Climate Change and Financial Stability, Speech at Lloyd’s of London, 29.09.2015, at https://www.bis.org/review/r151009a.pdf, p. 8; ECB (2021), pp. 8–9.
For selected aspects see, e.g., ECB (2021), pp. 148–154.This would be relevant in the context of asset purchases and the requirement that the conduct of credit operations by the ECB and ESCB with banks should be based on adequate collateral (Article 18.1 of the ESCB/ECB Statute, ECB (2021), p. 141).
Papoutsi et al. (2022), pp. 7–12, show that due to big differences in bond issuance across sectors the ECB’s corporate bond portfolio tilts towards carbon-intensive sectors.
Dafermos et al. (2020), pp. 9–13; for an overview of the debate on the carbon bias of the Eurosystem’s monetary policy see Breitenfellner and Pointner (2021), pp. 76–77.
European Parliament, Resolution of 16 February 2022 on the European Central Bank—Annual Report 2021 (2021/2063(INI)), at https://www.europarl.europa.eu/doceo/document/TA-9-2022-0029_EN.html.
This principle leads a central bank, in the context of an asset purchase program, to purchase securities in proportion to their relative market capitalization to minimize the impact of asset purchases on the price discovery mechanism and avoiding changing relative borrowing costs across sectors. See, e.g., Schnabel I, From Market Neutrality to Market Efficiency, Speech, 14.6.2021, at https://www.ecb.europa.eu/press/key/date/2021/html/ecb.sp210614~162bd7c253.en.html citing Benoît Cœuré.
Dafermos et al. (2020), pp. 4–5.Liebich L, et al., Unconventionally Green: Monetary Policy between Engagement and Conflicting Goals, Arbeitspapier, No. 05/2021 (2021), at https://www.econstor.eu/bitstream/10419/247311/1/1777516455.pdf, pp. 18–22.
European Parliament, Resolution of 16 February 2022 on the European Central Bank—Annual Report 2021 (2021/2063(INI)), at https://www.europarl.europa.eu/doceo/document/TA-9-2022-0029_EN.html.
See, e.g., Volz U, On the Role of Central Banks in Enhancing Green Finance, UN Enquiry Working Paper 17/01 (February 2017), at https://eprints.soas.ac.uk/23817/1/On_the_Role_of_Central_Banks_in_Enhancing_Green_Finance(1).pdf, pp. 18–19.
ECB (2021), p. 142 arguing that according to Article 192 TFEU the Union legislator is competent to decide what Union policy on the environment should be taken to contribute to the objectives of, inter alia, protecting the environment and promoting measures at international level to deal with worldwide environmental problems, in particular combating climate change.
ECB, ECB Presents Action Plan to Include Climate Change Considerations in its Monetary Policy Strategy, Press Release, 08.07.2021, at https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html.
For details on this action plan and the timeline for its implementation see ECB, ECB Presents Action Plan to Include Climate Change Considerations in its Monetary Policy Strategy, Press Release, 08.07.2021, at https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html and the Annex: Detailed Roadmap of Climate Change-related Actions, at https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1_annex~f84ab35968.en.pdf. Overall, the ECB’s activities will focus, inter alia, on developing new analytical models and analyses to monitor the implications of climate change and related policies, as well as new indicators for green financial instruments, banks’ carbon footprint, and their exposures to climate-related risks. The ECB announced to start disclosing climate-related information of the CSPP by 2023. As various aspects of this package rely on data provided by the corporate sector, the implementation of the action plan is intended to be in step with progress on the related EU policies.
ECB, ECB Takes Further Steps to Incorporate Climate Change into its Monetary Policy Operations, Press Release, 04.07.2022, at https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr220704~4f48a72462.en.html.
Ibid. For an overview of ongoing ECB actions in the area of climate change see also ECB, ECB Climate Agenda 2022, Press Release, 04.07.2022, Annex, at https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr220704_annex~cb39c2dcbb.en.pdf. For details on how the ECB intends to decarbonise its corporate bond holdings based on issuer-specific climate scores, see ECB, ECB provides details on how it aims to decarbonise its corporate bond holdings, Press Release, 19.9.2022, at https://www.ecb.europa.eu/press/pr/date/2022/html/ecb.pr220919~fae53c59bd.en.html.
European Parliament, Resolution of 16 February 2022 on the European Central Bank—Annual Report 2021 (2021/2063(INI)), at https://www.europarl.europa.eu/doceo/document/TA-9-2022-0029_EN.html; on the NGFS, see below.
Van Tilburg R, Simić A, Legally Green—Climate Change and the ECB Mandate, Sustainable Finance Lab Policy Paper (July 2021), at https://sustainablefinancelab.nl/wp-content/uploads/sites/334/2021/07/Legally-Green.pdf, p. 30.
See also below the ClientEarth vs. National Bank of Belgium case. Solana (2021), pp. 54–56.Breitenfellner and Pointner (2021), p. 65, with a detailed discussion of the market neutrality principle, monetary policy instruments, and the “carbon bias” of the Eurosystem’s monetary policy.
Breitenfellner and Pointner (2021), p. 59.For a detailed analysis of this case and its procedural and substantive aspects see Solana (2021), pp. 51–54, and Linklaters Sustainable Futures, Does the ECB’s Quantitative Easing Programme Fuel Climate Change? NGO ClientEarth Goes Back to Court after the Dismissal of its Claims, 17.02.2022, at https://sustainablefutures.linklaters.com/post/102hj1q/does-the-ecbs-quantitative-easing-programme-fuel-climate-change-ngo-clientearth.
Among other arguments, ClientEarth put forward that the ECB must act consistently with the EU’s climate objectives and policies pursuant to Articles 7 and 127(1) TFEU, that it should take into account environmental protection requirements in the design and implementation of its monetary policy pursuant to Article 11 TFEU and Articles 37 and 41(2)(c) of the EU Charter of Fundamental Rights, and that the ECB must mitigate climate-related financial risks (Solana (2021), p. 51, referring to ClientEarth letter to the ECB from 12.04.2021). The plaintiff also invoked Article 3(3) TEU, Article 11 and 296(2) TFEU. Client Earth, Why ClientEarth is Suing the Central Bank of Belgium for Climate Failings, Press Release, 13.04.2021, at https://www.clientearth.org/latest/latest-updates/news/why-clientearth-is-suing-the-central-bank-of-belgium-for-climate-failings/.
Tribunal de première instance francophone de Bruxelles, Section Civile, 21/38/C (1.12.2021).For details see ClientEarth, Why We’re Going back to Court against the Belgian National Bank, Press Release, 31.01.2022, at https://www.clientearth.org/latest/latest-updates/news/we-re-withdrawing-our-lawsuit-against-the-belgian-national-bank/.
The following reflections are based on observations of the UNFCCC Standing Committee on Finance, made in the context of an assessment and overview of climate finance flows, UNFCCC Standing Committee on Finance, Summary by the Standing Committee on Finance of the Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows (2020), at https://unfccc.int/sites/default/files/resource/54307_1%20-%20UNFCCC%20BA%202020%20-%20Summary%20-%20WEB.pdf, pp. 14–15.
Platform on Sustainable Finance, The Extended Environmental Taxonomy: Final Report on Taxonomy Extension Options Supporting a Sustainable Transition (March 2022), at https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/220329-sustainable-finance-platform-finance-report-environmental-transition-taxonomy_en.pdf. The report constitutes the Platform’s input to the European Commission’s report under Article 26 Taxonomy Regulation.
This vagueness may also be a source of litigation risk, see Solana (2021), p. 56. For examples see ongoing INSPIRE research projects, at Commissioned Projects—INSPIRE Green Finance.Bundesbank, Climate-related Data Successfully Procured. Key Milestone Reached for Incorporating Climate Factors, Press Release, 09.03.2022, at https://www.bundesbank.de/en/press/press-releases/climate-related-data-successfully-procured-869246.
The Eurosystem has developed practical implementation aspects of climate change-related sustainable and responsible investment principles in non-monetary policy portfolios, see ECB, Eurosystem Agrees on Common Stance for Climate Change-related Sustainable Investments in Non-monetary Policy Portfolios, Press Release, 04.02.2021, at https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210204_1~a720bc4f03.en.html.
ECB (2021), pp. 155–156.Regulation (EU) 2020/852 on the Establishment of a Framework to Facilitate Sustainable Investment and amending Regulation (EU) 2019/2088 (Taxonomy Regulation), OJ 2020 L 198/13.
Corporate Sustainability Reporting Directive (CSRD) (Directive of the European Parliament and of the Council amending Regulation (EU) No 537/2014, Directive 2004/109/EC, Directive 2006/43/EC and Directive 2013/34/EU, as regards corporate sustainability reporting, PE-CONS 35/22, at https://data.consilium.europa.eu/doc/document/PE-35-2022-INIT/en/pdf), empowering the Commission to adopt sustainability reporting standards taking account of the technical advice of the European Financial Reporting Advisory Group (EFRAG).
Cf. in this context also Article 15 of the Proposal for a Directive of the European Parliament and of the Council on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937, 23.02.2022, COM/2022/71 final, at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52022PC0071&from=EN, which requires MS to ensure that certain companies adopt a plan to ensure that the business model and strategy of the company are compatible with the transition to a sustainable economy and with the limiting of global warming to 1.5 °C in line with the PA. The appropriate enforcement authority remains to be discussed.
Cf., e.g., Articles 73 and 76 of the proposed Directive of the European Parliament and the Council amending Directive 2013/36/EU as regards Supervisory Powers, Sanctions, Third-country Branches, and Environmental, Social and Governance Risks, and amending Directive 2014/59/EU. 27.10.2021, COM/2021/663 final, at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52021PC0663&from=EN (“CRD6”).
Article 100 of the proposed CRD6.See specifically, Basel Committee on Banking Supervision, Principles for the Effective Management and Supervision of Climate-related Financial Risk (June 2022), at https://www.bis.org/bcbs/publ/d532.pdf. The principles build on the current Basel Framework and deduct from current supervisory initiatives and the work in international bodies. They develop a principles-based approach to enhance risk management and supervisory practices for climate-related financial risks.
Article 87a of the proposed CRD6.Such measures could, e.g., address business model or portfolio concentration risks, see Basel Committee on Banking Supervision, Overview of Pillar 2 Supervisory Review Practices and Approaches (June 2019), at https://www.bis.org/bcbs/publ/d465.pdf, pp. 12–15.
2° Investing Initiative, Taking the Plunge—A Stocktake of National Financial Sector Climate Alignment Assessments (November 2021), at https://2degrees-investing.org/wp-content/uploads/2021/11/PACTA-COP-Stocktake.pdf.
UNFCCC Standing Committee on Finance, Summary by the Standing Committee on Finance of the Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows (2020), at https://unfccc.int/sites/default/files/resource/54307_1%20-%20UNFCCC%20BA%202020%20-%20Summary%20-%20WEB.pdf, p. 15.
Cf. in this context Platform on Sustainable Finance, The Extended Environmental Taxonomy: Final Report on Taxonomy Extension Options Supporting a Sustainable Transition (March 2022), at https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/220329-sustainable-finance-platform-finance-report-environmental-transition-taxonomy_en.pdf.
On the status quo see Berg et al. (2022), p. 20 and NGFS, Credit Ratings and Climate Change—Challenges for Central Bank Operations, Report (May 2022), at https://www.ngfs.net/sites/default/files/medias/documents/credit_ratings_and_climate_change_-_challenges_for_central_bank_operations.pdf, p. 5. The European Commission consulted to identify possible shortcomings in relation to the consideration of sustainability risks in credit ratings and the disclosures made by credit rating agencies, see European Commission, Targeted Consultation on the Functioning of the ESG Rating Market in the European Union and on the Consideration of ESG Factors in Credit Ratings, Consultation Document (2022), at https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/2022-esg-ratings-consultation-document_en.pdf.
Council of the EU, The Council Adopted Conclusions on Export Credits, Press Release, 15.03.2022, at The Council adopted conclusions on export credits—Consilium (europa.eu).
Cf. in this regard the Proposal for a Regulation of the European Parliament and of the Council on European Green Bonds, 06.07.2021, COM/2021/391 final, at https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:52021PC0391&from=EN.
See, e.g., Deloitte, Recommendations Report—Designing Recommendations for a Sustainable Capital Markets Strategy and Action Plan for Hungary, 31.01.2022, at https://www.mnb.hu/letoltes/recommendations-report-deloitte-sustainable-capital-market.pdf, pp. 15–16.
This seems particularly important as researchers point out that “investors reallocating capital to sustainable activities does not appear to influence corporate decision-making but shareholder resolutions do”, see Rydge (2020), p. 16.
Sharm el-Sheikh Implementation Plan. Revised draft decision. FCCC/CP/2022/L.19, paras. 40–41, at https://unfccc.int/sites/default/files/resource/cp2022_L19_adv.pdf.
Cf. in this regard the UN Environment Programme Finance Initiative (UNEP FI) Recommendations for Credible Net-Zero Commitments from Financial Institutions (2021), at https://www.unepfi.org/publications/recommendations-for-credible-net-zero-commitments-from-financial-institutions/. Furthermore, the 1st Progress Report of the UN-convened Net-Zero Asset Owner Alliance of asset owners that commit to achieving net-zero portfolios by 2050 and establish intermediate targets every 5 years in line with the PA’s goal of limiting warming to 1.5 °C (UN-convened Net-zero Asset Owner Alliance, Credible Ambition, Immediate Action (October 2021), at https://www.unepfi.org/wordpress/wp-content/uploads/2021/10/AOA-Progress-Report-2021.pdf).
ECB, ECB Presents Action Plan to Include Climate Change Considerations in its Monetary Policy Strategy Press Release, 08.07.2021, at https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html.
Solana (2021), pp. 54–56.ECB, ECB Presents Action Plan to Include Climate Change Considerations in its Monetary Policy Strategy, Press Release, 08.07.2021, at https://www.ecb.europa.eu/press/pr/date/2021/html/ecb.pr210708_1~f104919225.en.html.
Demekas D, Grippa P, Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy: A Survey of the Issues, IMF Working Paper, 17.12.2021, at https://www.elibrary.imf.org/view/journals/001/2021/296/article-A001-en.xml, p. 28.
Robins et al. (2021) argue that central banks and supervisors should have a role in providing advice to governments on what the financial system needs to do to facilitate the transition and achieve an effective intermediation of net-zero investment. Furthermore, with their oversight of the financial sector and the macroeconomy, they see central banks and supervisors as well placed to identify macrofinancial risks stemming from the net-zero transition and to provide advice to governments on addressing these risks (pp. 6 and 9).
Demekas D, Grippa P, Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy: A Survey of the Issues, IMF Working Paper (17.12.2021), at https://www.elibrary.imf.org/view/journals/001/2021/296/article-A001-en.xml, discuss in detail whether the legal frameworks currently governing central banks and financial regulators are still fit for purpose in the face of the climate challenge, providing an overview of the arguments and pointing out potential pitfalls and repercussions on the political economy, design, operation, mandate, and functions of central banks and financial regulators.
UNFCCC Standing Committee on Finance, Summary by the Standing Committee on Finance of the Fourth (2020) Biennial Assessment and Overview of Climate Finance Flows (2020), p. 15, at https://unfccc.int/sites/default/files/resource/54307_1%20-%20UNFCCC%20BA%202020%20-%20Summary%20-%20WEB.pdf.
Demekas D, Grippa P, Financial Regulation, Climate Change, and the Transition to a Low-Carbon Economy: A Survey of the Issues, IMF Working Paper (17.12.2021), at https://www.elibrary.imf.org/view/journals/001/2021/296/article-A001-en.xml, p. 28.
