SUSTAINABLE FINANCE ROUNDUP

Study on Taxonomy KPIs

Article by Adrian Schwantes, Association of German Banks (BdB)

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In preparation for the forthcoming Green Asset Ratio, the Association of German Banks analysed the taxonomy profile of the broader economy. The study covering around 450 corporates shows that the GAR will not adequately represent the banks’ sustainability profile.

It concludes that only 30 percent of the economy is currently covered by the taxonomy. More precisely, the taxonomy only applies to a very limited number of sectors in a substantial manner. Those sectors are typically already the focus of discussions around sustainability, such as real estate, energy or automotive. The rest of the broader economy – around 70 percent of the economy – is not covered by the taxonomy and thus has no pathway towards sustainability within the taxonomy’s regulatory meaning.

The data also illustrates that industry is largely still at the beginning of its transition – even those sectors that are covered by the taxonomy. Only 7 percent of the analysed corporates’ turnover currently fulfils the taxonomy’s technical standards.

Since a bank’s typical balance sheet reflects the broader economy rather than a highly limited number of sectors, these low KPI values will be transferred to the bank’s taxonomy KPIs. This clashes with the immense efforts undertaken by many banks to integrate sustainability-matters into their strategies and business processes.

In fact, many methodological specifics of the GAR artificially decrease the KPI for banks even further from the industrial average. One example is the exclusion of SME-exposures from the GAR-numerator but not the GAR-denominator. This results in the exclusion of many project finance structures from the GAR, including SPV-structures commonly used in commercial real estate or sustainable energy financing.

Thus, the GAR misrepresents the actual sustainability profile of banks considerably. Correspondingly, it should not be used as a steering or controlling parameter and it should not be the basis for future regulatory measures.

Rather than focusing on less than ideal KPIs, the transition of the economy should be at the forefront of the political agenda. This transition is a steady process involving intermediate steps towards more sustainability. In order to promote this wider transition, it is necessary to move beyond the taxonomy’s binary approach and focus on transitional activities and their financing.

The study on the industry’s taxonomy profile is available here. The study analysed the taxonomy KPIs of more than 450 corporates. The analysed corporates consist of the constituents of the leading indices of the EU’s 10 largest economies and EU-based corporates included in the STOXX Europe 600.

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For more information:

Alexia Femia, Financing Sustainable Growth Adviser, a.femia@ebf.eu

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