EBF SUSTAINABLE FINANCE ROUNDUP ARTICLE

h

‘Practical approaches to applying the EU Taxonomy to bank lending’, EBF-UNEP FI joint report 

x

BRUSSELS, 17 March 2022 – At a time when regulation is being rolled out at overwhelming speed with the aim of incorporating sustainability in all areas of business, leading European banks came together as part of the second phase of the joint EBF-UNEP FI project to discuss the application of the EU Taxonomy, but also to explore its potential to facilitate engagement with customers in the evolving business and regulatory environment.  

The year-long discussion and exchange of views and practices itself benefited and moved the banking industry forward as a whole. The value of the resulting report, “Practical approaches to applying the EU Taxonomy to bank lending”, is undisputable for banks that will need to implement the Taxonomy regulation and the related disclosure requirements. In addition, the insight provided will help companies understand the possible impact on their business, the direction of travel and how engagement between banks and companies may evolve. The report will also help stakeholders understand and demystify the Green Asset Ratio and hopefully provide helpful insights and inputs to regulators and legislators as they further develop the sustainable finance framework. 

First and foremost, the report covers the regulatory application of the EU Taxonomy (Section A). It focuses on disclosure requirements under the EU Taxonomy Disclosure Delegated Act looking at the practical aspects of reporting for banks, such as the use of NACE codes, reporting on general- purpose lending, and possible processes for the implementation of the regulation. It also aims to facilitate the understanding of the Green Asset Ratio for external stakeholders.  

The report then investigates the possible non-regulatory applications of the EU Taxonomy. 

Within Section B, the report explores how the EU Taxonomy could be further used to gather EU Taxonomy compatible information for banks’ clients who do not yet have an obligation to disclose under the Article 8 Delegated Act of the EU Taxonomy Regulation, or in other words SMEs and non-EU companies, often referred to as non-NFRD companies. At the time of finalization of this report, there was no mandatory obligation for banks to report the Taxonomy alignment of their exposures to non-NFRD companies, although the EBA is proposing  mandatory KPIs on such exposures in their final draft of binding standards on Pillar 3 disclosures on ESG risks, which is still subject of adoption process of the European Commission. This chapter also addresses compliance with minimum safeguards of the EU Taxonomy regulation and simple tools such as a questionnaire that could be used to gather EU Taxonomy-aligned data as a starting point. 

It is important that banks finance all activities capable of accelerating companies’ transition. Financial solutions based on companies’ transition plans could, in the future gain importance and, in a complementary manner to the financing of the EU Taxonomy aligned activities, substantially contribute to achieving the global objectives of net zero. 

Finally, Section C discusses in an exploratory way, how the EU Taxonomy could be used by banks that wish to engage with clients whose economic activities are eligible for analysis under the EU Taxonomy but are not yet aligned with the listed Technical Screening Criteria. Such an application of the EU Taxonomy for client engagement (e.g., using the Technical Screen Criteria to set targets) is still at an early stage.  

This section provides the participating banks’ initial thoughts on the matter and outlines a simple transition engagement tool—a step-by-step approach for banks that wish to evaluate the degree of misalignment of their clients ‘activities with the EU Taxonomy, to choose the appropriate engagement strategy. It further explores other possible financing solutions based on the transition plans of companies. Finally, this section looks at possibilities of mapping exposures to the EU Taxonomy based on NACE-sub activities and products codes of companies to actively steer the financing of sustainable activities.  

As invaluable as the report is, it does not have all the answers. There is lot of work still to be done. Many more discussions on the practical application of the taxonomy can be expected both in the corporate sector and banks. The engagement with SMEs will be even more challenging. Should the Commission approve the mandatory taxonomy disclosure of banks on their SME portfolio as proposed by the EBA, we will need further discussions not only on how to find a right balance between direct engagement and use of practical solutions but also discussions on how to bring the EU Taxonomy closer to SMEs. 

It is not about the willingness of the SMEs to report taxonomy alignment, it is about their capacities to do so as information will be needed to assess all exposures, not only the “green financial products”. No one has a silver bullet or definitive solutions to put on the table. We need to work together, in a structured dialogue between authorities, the business sector and banks with the objective to step up clear communication and educational efforts and to find common practical solutions at sectoral level including defining clear sectoral transition plans.   

Only through understanding of each other’s objectives, challenges and needs, will we be able to achieve our common goals. This report is a first step to such a dialogue as it will help better understand the current thinking within the banking industry.  

x

For more information:

Denisa Avermaete, Senior Policy Adviser, Susatinable Finance d.avermaete@ebf.eu

Alexia Femia, Policy Adviser, Sustainable Finance a.femia@ebf.eu

x

About the EBF:

The European Banking Federation is the voice of the European banking sector, bringing together national banking associations from across Europe. The EBF 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