The EU will look into lowering capital charges for banks with eco-friendly investments as it works to establish a clear classification system for "green" activities.
The European Commission, the EU's executive arm, said it will outline a proposed taxonomy in May that will define what investments are sustainable as part of an action plan that will also see the creation of labels for financial products.
The taxonomy, expected to be adopted by the second quarter of 2019, will provide a classification system for environmentally sustainable activities and will identify where investments can have the greatest impact. An EU Ecolabel for green financial products, which will help to guide investors, will be introduced once the taxonomy is in place.
Demand is growing for green bonds and other kinds of eco-friendly financing as issuers and investors seek to channel funding toward projects aimed at reducing carbon emissions. The Climate Bonds Initiative, a nonprofit organization, estimates that green bond issuance will rise to $250 billion in 2018, from $157 billion in 2017.
Clear standards
But the absence of a single comprehensive standard defining what constitutes a green investment has raised fears of so-called greenwashing, when companies make an investment sound more environmentally friendly than it is.
"Unless we have a Europe-wide taxonomy or classification in place, the market is wild," Commission Vice President Jyrki Katainen told a news conference. "You can claim everything is green if you want and it may mislead investors."
The EC will also propose that institutional investors and asset managers take sustainability into account when making investment decisions. This echoes a move by France, which in 2015 became the first country in the world to impose mandatory climate reporting requirements on asset managers.
The proposals are based on recommendations by the EC's High-Level Expert Group on Sustainable Finance published Jan. 31. The EU estimates that it will need to invest €180 billion annually to meet its pledge of reducing CO2 emissions by 40% by 2030 and intends to invest in energy-efficient buildings, renewable energy generation and low-carbon transportation.
Capital charges
The commission also said it would look into the possibility of adjusting capital requirements for banks making eco-friendly investments — the so-called green supporting factor.
Banks have been seeking more clarity from the EC on this issue; Valdis Dombrovskis, the EU commissioner for financial stability, financial services and the capital markets union, said talks are ongoing, with the European Parliament having put forward a proposal.
The EC already eases capital requirements for banks lending to small and medium-sized businesses, and insurers investing in infrastructure, and a similar approach could be adopted for green investments, Dombrovskis said.
"Each project is assessed based on its risks and, of course, higher risks for green projects will mean higher capital requirements," he said.
Katainen stressed that, for example, an investment in energy-efficient apartments is not the same as one in a steel factory. Furthermore, the commission does not consider that green investment in general equates to lower risk.
"We believe there may be opportunities to look at some sectors where capital requirements could be recalibrated but we don't want to do anything artificial which only looks nice on paper but could lead to other problems," Katainen said.
"We have to find a good balance ... I am sure that there are ways to do it but we need more facts before acting."
The expert group had stopped short of recommending a green supporting factor in its January report, saying there was not enough evidence to demonstrate that green investments carry "significantly lower risk at the micro level."
As part of the action plan, the EC also aims to strengthen sustainability disclosures and ensure accounting rules do not discourage sustainable and long-term investments.
