A new report by the Association for Financial Markets in Europe (AFME) and Linklaters titled, “Sustainable Finance in Europe: Regulatory State of Play” provides a practical guide to the significant number of initiatives which make up the regulatory framework for sustainable finance in the EU, UK and Switzerland. It highlights how the banking sector is impacted and makes recommendations to further the goal of developing sustainable finance in Europe.
The report provides analysis and identifies key milestones and actions for the banking industry in the five key elements of the European sustainable finance regulatory framework including:
- Sustainability reporting and disclosures;
- The development of taxonomies for sustainable activities;
- The development of market standards;
- Incorporation of ESG into banks’ risk management; and
- Initiatives relating to sustainable corporate governance.
Oliver Moullin, Managing Director for Sustainable Finance at AFME, said: “Important progress has been made on the regulatory framework for sustainable finance. As we heard at COP26, it is essential to get the regulatory “plumbing” right to facilitate investments in support of sustainability goals.
“The urgency of action has spurred an unprecedented number of initiatives in a short space of time. This report provides a practical guide for banks, helping them and their clients navigate the various initiatives; and highlights recommendations in support of the crucial goals of mobilising finance and ensuring the resilience of the financial sector to climate-related risks.”
Vanessa Havard-Williams, global head of environment and climate change at Linklaters, added: “Momentum is building globally on sustainable finance. Market participants face both opportunities and challenges in navigating the ever-evolving legal and regulatory framework. Having an understanding of this shifting landscape and what actions should be taken, which we hope this report provides, is key to keeping aligned with regulatory expectations and bringing about change in the long-term.”
AFME assesses the current state of play of the European regulatory framework and highlights three priority areas to facilitate the flow of capital to help achieve sustainability objectives:
- Finalising effective foundations
Significant progress has been made over a short space of time, but it is important to finalise and implement effective regulatory building blocks as enablers of sustainable finance including (a) developing a disclosure framework for sustainability reporting; (b) providing a common classification system of sustainable economic activities; and (c) ensuring that ESG risks are effectively integrated into banks’ risk management.
- Ensuring coherence and consistency
Due to the urgency of the task to tackle climate change, a very large number of initiatives have been put in place in a short space of time. While recognising the urgency of the task at hand, it is necessary to ensure that the framework is coherent and consistent, particularly as many aspects are complex and interconnected.
As the foundations are finalised, AFME calls on policymakers and regulators to carefully consider the coherence of the framework as a whole to ensure that it is meeting its goals of facilitating the allocation of investment to meet sustainable objectives, avoids undue complexity and overlapping, duplicative or inconsistent requirements. Further enhancing the consistency, understanding and usability of the framework would facilitate its implementation and help support well-functioning sustainable finance markets.
- Strong international coordination
Climate change and other sustainability objectives are a global challenge which necessitates an internationally coordinated response. In order to maximise the benefits of sustainable finance, it is vital to leverage international capital markets and to provide a coherent approach for multinational businesses and financial institutions which are key to supporting the transition.