The European Banking Authority’s roadmap on sustainable finance

EBA is the acronym for the European Banking Authority. The organisation works alongside two other financial groups to provide and sustain new financial regulations across Europe whilst promoting governance, combating financial crime and increasing trust in services for consumers.  

The EBA is the organisation responsible for regulations such as the Single Rulebook, Basel III and transitioning European companies towards being more sustainable. Their overall aim is to maintain a stable banking sector and harmonise regulatory compliance across the continent. 

The European Banking Authority’s roadmap on sustainable finance was published in December 2022, replacing a previous action plan from 2019. It details the 8 areas to build on over the next three years, focusing on environmental factors that fit into the larger ESG ethos. 

Phases of the European Banking Authority’s roadmap on sustainable finance

There are eight key areas for the European Banking Authority’s roadmap towards sustainable finance:

1. Transparency and disclosures
2. Risk management and supervision
3. Prudential treatment of exposures
4. Stress-testing 
5. Standards and labels
6. Greenwashing
7. Supervisory reporting
8. ESG risks and sustainable finance monitoring

Transparency and disclosures

The first part of the action plan focuses on standardising the claims that investment firms and other regulated institutions are allowed to make. 

The initial part of this was released in January 2022 and is known as the pillar 3 disclosures.

This tells regulated organisations exactly which financial disclosure can be made in terms of sustainability, under the Implemented Technical Standards (ITS). 

It works alongside sustainability disclosure regulation from the United Nations, which is overseen by the Taskforce on nature-related disclosures. 

There were further consultations in March and April of 2022 around sustainable development standards, so we expect to see more updates around transparency soon. 

Risk management and supervision

Back in June 2021, an initial risk management report was released. This detailed the EBA’s impacts on sustainability risks for credit institutions and later recommendations. A separate report aimed at the ESG considerations for investment and asset managers was released later in October 2022.

Lastly, the SREP guidelines were also updated in 2022. This incorporated the capital requirements directive for credit institutions and compiled best practices from multiple previous legislations.

Prudential treatment of exposures

A prudential framework for capital requirements has been created. This should reduce the market risk in times of economic uncertainty, ensuring that banks and other financial institutions remain operationally resilient. 

A discussion paper for environmental risks was also released in 2022, exploring how to incorporate risks into regulations. It also explores how well the current prudential framework addresses exposures. 

Stress-testing

The first round of climate-related stress tests was performed in October 2021. The purpose of these was to figure out operational resilience among regulated firms when they become compromised by climate factors. Assessing ESG risk is paramount for long-term progress. 

Later in May 2021, 29 banks took part in a pilot study. This allowed researchers to gather more in-depth insights, and determine that there are still vulnerabilities which require addressing if the EU are to reach their 2030 climate goals.

Standards and labels

March 2022 saw the release of a report on the challenges relating to standards and labels within the EBA sustainable finance framework. 

It is also expected that by the end of December 2023, institutions like the central bank will be able to offer new green retail loans and green mortgages. This pays particular attention to the green bond market and requires further development before being finalised.

Greenwashing

While the term ‘greenwashing’ has been used numerously in recent years, this is possibly the slowest-growing segment of the roadmap. 

A progress report on greenwashing is set to be released in May 2023, with a final report in May 2024. Both of these documents should address greenwashing risks in the market and the current challenges that organisations are facing. 

The resultant discussion should also make clear recommendations on how to amend the current framework to promote sustainable investing within the financial system. The knock-on effect could be felt by investors, making the investment sector easier to navigate as an asset manager follows the disclosure requirements. 

Supervisory reporting

As part of the sustainability plan, there are monitoring and supervision tasks required by companies on an ongoing basis. This will likely be developed over the next few years to create standardised reporting formats. 

The EBA must also determine if there is a way to collect those pillar 3 disclosures from the first section systematically. Implementing this across European entities would be the next step.

ESG risks and sustainable finance monitoring

Finally, the EBA’s sustainable finance roadmap includes combining its plan with the likes of global emerging regulations. 

For example, nothing should contradict what’s been stated already in the Paris Agreement and UN climate framework. Do policies align with the US and UK government green finance plans?

The end proposal’s methodology must also be evaluated in terms of its effectiveness and scope to meet the climate goals. 

How to stay updated with the ongoing legislative changes

Of course, as more of these reports and recommendations are released, companies will find it harder to keep up. But the cost of non-compliance is a risk that’s too big to ignore. 

Use CUBE’s RegPlatform to automate regulatory change management and stay on the right side of compliance. 

Keep ahead of emerging regulations and guidance by speaking to CUBE.