Banks cautiously optimistic about EU’s sustainability framework

Author: Jimmie Franklin | Published: 2 Jul 2019
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Sustainable finance has rapidly risen up the agenda of banks and asset managers as they grapple with reasonable reputational risk. The EU has jumped into action in recent years, laying the groundwork for its recently-announced taxonomy framework for sustainable finance.

The framework includes: the establishment of an EU classification system for sustainable activities, standards and labels for green financial products, the fostering of investment in sustainable projects, the incorporation of sustainability when providing investment advice, and the development of sustainability benchmarks.

Michael Doran, partner at Baker McKenzie, said it is clear that the Commission is looking to hardwire this and create a new, common language for the sustainable financial system.

"All market players will adopt that language and report accordingly," he added. Clearly, while sweeping reforms that will drastically affect how banks report on relevant issues are in the pipeline, they are also willing to adapt.

"We are certainly working diligently to prepare ourselves and help our customers’ transition to a low-carbon economy," said Jeanette Fangel Løgstrup, head of group societal impact & sustainability at Danske Bank.

"The financial sector as a whole is at the start of a journey that will require focus and hard work to develop a more detailed understanding of climate-related risks and opportunities – and integrate these insights into our business models."

Fangel Løgstrup welcomed the prospect of an EU-wide framework. "We find it very useful for the sector as a whole to have this as guidance and a common framework with clear definitions of what is perceived to be green" she said. "It will support our work of further developing offerings within sustainable finance."

Gerald Podobnik, head of capital solutions and sustainable financing at Deutsche Bank said that "on the whole, we are very supportive of the whole undertaking of the EU taxonomy framework. This is because we are bankers, not climate scientists, thus we need someone to tell us which use of proceeds are actually green, and we are very happy that the EU is doing that work".

Giuseppe Zammarchi, head of sustainability and foundation at UniCredit, views "the establishment of an EU classification system for sustainable activities a significant step towards the orderly transition to a low carbon and climate resilient economy".

Zammarchi continued: "We see it as a very useful tool for understanding how to assess what is sustainable and not."

Optimism about the EU’s taxonomy framework can be attributed to the fact that, up until now, there had been various interpretations of what is 'green’ from various sources.

"This made it difficult to create an efficient market and ensure that the overall banking system is singing from the same hymn sheet," added Podobnik.

With this in mind, he feels standardisation is "really important", and is positive about the approach that the taxonomy is taking, which allows players to "open up a document, see what is defined as green, and proceed from there."

KEY TAKEAWAYS

· European banks are implementing forward-thinking policies on climate change, which include divestment from contentious areas like coal;

· There is positivity about the EU’s long-awaited EU framework;

·The framework offers formal interpretation of sustainability activities for financial stakeholders and reduces room for doubt or differing views.

He pointed to the bank’s sustainability council, where members have worked on establishing an internal taxonomy based on the EU’s draft action plan. "This will mean we can actually define what is green and what is sustainable in our exposure," he said. "In addition, it has allowed us to look at which businesses we would like to grow and which businesses we want to divest from."

As of late, Deutsche Bank has committed to no more financing for new coal power, and has a target to reduce its thermal coal mining portfolio by 20% by next year.

 "We believe that the use of renewable energy is vital to tackling the problem of climate change in the long term," said Giuseppe, pointing to UniCredit’s renewable energy projects portfolio, which was €7.8 billion at the end of 2018.

"Climate change is an increasingly important issue for all businesses and the society as a whole," he said.

Zammarchi and Podobnik’s thoughts were echoed by Outi Helenius, head of sustainability at Finnish bank Evli. Helenius stated that she found the goal of taxonomy – to have common language that would define sustainable activities – as positive.

She continued that it "could also help the market to steer the investments to the companies fostering sustainable activities".

She was, however, cautious in her optimism. "Since sustainability is a complex matter and not easy to define, there are always different opinions as to what should be included in the taxonomy and what’s not," she said. "So it remains to be seen what will be the real impact, and how investors will start using it in practice."

Podobnik was equally apprehensive of a full endorsement, summarising that "the devil is always in the detail".

He continued: "What will be important in the stages of finalisation over the next couple of months is to make sure that it remains usable, and does not become too complex."


"What will be important in the stages of finalisation over the next couple of months is to make sure that it remains usable, and does not become too complex."


He stressed that players will need as much implementation help as possible, and not just on the subject of green causes, but also on the 'do no significant harm’ element.


This is the principle that while contributing to one environmental objective, the activity in question doesn’t significantly harm any of the additional five objectives.

"There is, perhaps, not too much room for interpretation, because otherwise we risk having something that is implemented in different ways," said Podobnik.