EBF SUSTAINABLE FINANCE ROUNDUP ARTICLE
“Banks should be considered facilitators, but transition can’t only rest on their shoulders”, says Giovanni Sabatini, General Manager of the Italian Banking Association and Chair of the EBF Steering Committee for Financing Growth
BRUSSELS, 30 November 2021
There are some preconditions for banks to play their role in the sustainable finance domain:
- Availability of good quality ESG data from enterprises and adequate metrics to measure their level of sustainability.
- Proportionality: impacts on SMEs should be taken into consideration and the transition should not be traumatic for smaller enterprises; in addition, sustainability reporting for smaller banks should be reasonably calibrated based on the contribution of their portfolio to the transition.
- Banks should be provided with incentives (e.g. Sustainable Finance Supporting Factor proposed by the EBF).
Institutions are specifically called upon to consider the noteworthy lack of data currently available on these issues: the situation is already evident in relation to the environmental factor (and therefore referring to the environment and climate), but it seems to us that the Platform’s expansion to include social issues will face the same problems.
Data collection will have to be carried out based on information standards which will have to be defined at the EU level, but also at the global level. It would be good if non-financial standards on a global level (the IFRS Foundation should set them) consider the European experience, which represents an innovative model.
Maximum collaboration with companies is needed to increase the transparency of the sustainability profiles of economic activities and to generate good quality ESG data.
We must be aware that if enterprises (including banks!) do not adequately report their own sustainability profiles, this can be interpreted as a lack of transparency and thus produce consequences that are probably worse than those connected to an honest representation of gaps to be bridged. This is as true for businesses as it is for banks.
Together we need to identify the most meaningful indicators to collect in order to keep the scale of effort manageable while still obtaining a correct ESG profile of our customers: however, this is a complex issue because the answer depends on the economic sector, location, the vulnerability factor, etc. To draw a historical parallel, it is as if we were in the early stages of medicine when it was not yet known which laboratory analysis would be best for evaluating and monitoring a particular aspect of an individual’s health. Today we know that cholesterol tells us about a lot for certain pathologies and blood sugar for others. Similarly, for ESG evaluations, we will have to identify the most suitable information from what is available for determining whether a company is well-positioned and, what seems even more difficult, to choose the information that is predictive of potentially reduced or increased ESG related financial risks.
The role of trade associations of non-financial companies is key to increasing awareness and encouraging reporting that is useful for companies to describe their sustainability profile in a manner that is structured and consistent with standards. Supporting companies on this path means first helping them enhance the different paths of excellence already in place and bringing them to a common understanding. It also means growing the demand for sustainable finance banking and financial products and services.
We should not forget that achieving the challenging environmental and social sustainability goals in Europe also depends on the ability of the capital market to channel the necessary resources from private investors to complement the public funds. In recent years, thanks in part to European regulatory pressure (e.g., the disclosure requirements for market participants and the integration of ESG factors in the rules of investment services, etc.), the capital markets have made significant progress in developing investment products that integrate sustainability objectives. A key role in this context is played by green and sustainable bonds, for which the market is growing in terms of issuers and volume, confirming the ability of the capital markets to give clear signals on how sustainability, especially environmental sustainability, is reflected in investments and in the real economy.
Banks, in their role as lenders, as well as capital markets issuers and intermediaries, support sustainable economic initiatives, from an environmental and social point of view. The setting of EU market standards at a European level, as recently proposed by the European Commission, will certainly contribute to further developing the green bond market in Europe. Real progress on the CMU Action Plan is urgently needed if we want the Capital Market Union to support the success of the Sustainable Finance Action Plan.
EU banks can play a key role in sustainable finance but could find themselves squeezed between the increasing demands of the regulators and supervisors and the difficulties faced by enterprises in providing the relative sustainability data.
The timing imposed on banks for providing ESG information under the various regulatory measures on sustainable finance could create a substantial misalignment between what European legislation currently requires and the practical possibility of banks to fulfil these obligations, especially for data to be made available by their counterparts.
Banks are rightly scrutinized by their stakeholders on their activities to support the transition. At the same time, they should not be required to shut out certain sectors from financing entirely, especially those sectors that may currently not be well-positioned but can still move forward with the transition from an environmental and climate point of view. We are not just talking about Sustainable Finance, but also financing the transition or Transition Finance.
Finally, it’s interesting to notice how Article 87a of the Commission’s Proposal for the new CRR/CRD seems to ask banks to adapt their business models to the relevant policy objectives of the Union and broader transition trends towards a sustainable economy. Something very new that needs to be better understood.
European Banking Federation
The European Banking Federation is the voice of the European banking sector, bringing together national banking associations from across Europe. The federation is committed to a thriving European economy that is underpinned by a stable, secure and inclusive financial ecosystem, and to a flourishing society where financing is available to fund the dreams of citizens, businesses and innovators everywhere.
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