European Union

The EU has numerous policies and regulations in place to promote a green economy, notably several climate risk management guidelines, mandatory climate related financial disclosures and a stress test. The EU sustainable taxonomy and green bond standard is regularly used as a benchmark and standard for other countries.

Regulation and supervision

Climate stress testing

Is there climate stress testing? In progress

Relevant authority European Central Bank and European Banking Authority

Details Announced in 2020, results expected in 2022.

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Climate risk management guidelines

Are there any regulatory guidelines on managing financial risks from climate change? Yes

  • Report on Environmental, Social and Governance Risk Management and Supervision

Relevant authority European Banking Authority

Enforced June 2021

The report provides a comprehensive proposal on how ESG factors and ESG risks should be included in the regulatory and supervisory framework for credit institutions and investment firms.

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  • Low Carbon Benchmarks Regulation

Relevant authority European Central Bank and European Banking Authority

Enforced April 2020

Defines two new types of climate benchmark: the EU climate transition benchmark, labelling portfolios on a ‘decarbonisation trajectory’ towards the Paris agreement objectives, and the EU Paris-aligned benchmark, labelling those which are already aligned with objectives of the Paris agreement insofar as the carbon emission savings of each underlying asset exceeds it carbon footprint.

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  • Guide on Climate-related and Environmental Risks

Relevant authority European Central Bank

Enforced November 2020

The guide outlines the ECB’s understanding of the safe and prudent management of climate-related and environmental risks under the current prudential framework. It describes how the ECB expects institutions to consider climate-related and environmental risks when formulating and implementing their business strategy and governance and risk management frameworks.

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Green prudential policies

Are there green prudential policies? Under consideration

Relevant authority European Banking Authority

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NGFS membership

Member of the Central Banks and Supervisors Network for Greening the Financial System? Yes. The European Central Bank co-chairs the work stream on bridging the data gaps.

Relevant authority European Central Bank

Additional members European Banking Authority, European Insurance and Occupational Pensions Authority, European Securities and Markets Authority

Disclosures

Mandatory reporting of climate-related disclosures

Is reporting under, or aligned with, the Task Force for Climate-related Financial Disclosures framework mandatory or endorsed by government? Yes

Relevant authority European Central Bank and European Banking Authority

Details Announced June 2019

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TCFD supporters
Supporters are organisations that publicly and voluntarily endorse TCFD implementation.

Total number of supporters 842

Number of financial sector supporters 449

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Other sustainability-related disclosures

Are there mandatory rules on sustainability-related disclosures (aside from TCFD)? Yes

  • Sustainable Finance Disclosure Regulation

Relevant authority European Central Bank and European Banking Authority

Details Enforced 2021

The SFDR lays down harmonised rules for financial market participants and financial advisers on transparency with regards to the integration of sustainability risks and the consideration of adverse sustainability impacts in their processes and the provision of sustainability-related information with respect to financial products. The necessary disclosures include:

-All financial market participants must publish information about how they are integrating sustainability risks into their investment decision making process.

-Financial market participants have to have on their websites statements about the principal adverse impacts of investment decisions on sustainability factors and due-diligence policies with respect to those impacts, taking into account the size, nature and scale of their activities and types of financial products they make available. Wherever they do not consider adverse effects of investment decisions on sustainability factors, they must disclose reasons for not doing so, and where relevant, information on whether and when they intend to consider such adverse impacts

– It also requires a clear and reasoned explanation of whether a financial product considers principal adverse impacts on sustainability factors, and if so, how.

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  • Report on Climate-related Disclosures

Relevant authority European Central Bank and European Banking Authority

Enforced January 2019

Defines the relationship between the non-financial reporting directive and taskforce on climate-related financial disclosures and outlines how companies could integrate the two disclosure requirements.

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  • Non-financial Reporting Directive

Relevant authority European Commission

Enforced 2014

Companies are required to prepare a non-financial statement containing information relating to environmental, social and employee-related matters, respect for human rights, anti-corruption and bribery matters.

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Sustainable taxonomies

Is there a sustainable finance taxonomy? Yes

  • EU Sustainable Finance Taxonomy

Relevant authority European Commission

The EU taxonomy sets out four overarching conditions that economic activities have to meet in order to qualify as environmentally sustainable. These must contribute substantially to one or more of the objectives while not significantly harming any other objectives, meeting minimum social safeguards and complying with six technical screening criteria.

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Climate action

Net zero commitment

Net zero target year 2050

Status Mandated in law

The EU’s net zero commitment is in line with the European green deal and its pledge to global climate action under the Paris agreement. EU member states are required to develop national long-term strategies on how they plan to achieve the green house gas emission reductions needed to meet their commitments under the Paris agreement and EU objectives. The Europe Commission presented its long-term strategic climate vision in 2018, including a target of climate neutrality by 2050.

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Carbon pricing

Is there a carbon pricing policy? Yes

  • EU Emissions Trading System

Year implemented 2005

The EU’s ETS operates under a cap and trade principle. It imposes a cap of GHGs that companies can emit every year, called carbon credits. Industries with low emissions can sell their extra allowances to larger emitters. The cap is reduced over time so that total emissions levels will fall.

Share of jurisdiction’s GHG emissions 39%

Carbon price   $50 per tonne of carbon dioxide equivalent

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Nature and biodiversity

Nature-related financial policy

Is there a nature- or biodiversity-related financial policy? Yes

  • Natural Capital Financing Facility

Relevant authority European Commission and European Investment Bank

Year implemented 2015

The NCFF supports projects delivering on biodiversity and climate adaptation through tailored loans and investments, backed by an EU guarantee. This includes ecosystem-based solutions to challenges related to land, soil, forestry, agriculture, water and waste.

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Fiscal policies

Tax, tariffs and incentives

Is there a policy? Yes

  • EU Energy Taxation Directive

Year implemented 2003

Establishes rules for taxation of energy products. Undergoing review to better reflect current energy mix and the EU’s climate objectives.

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Covid-19 relief and recovery

Are sustainability requirements integrated in Covid-19 relief measures? Yes

The EU’s Next Generation EU recovery stimulus package, which will support the European green deal, backs a variety of measures to improve progress towards environmental goals. 37% of the €750bn package will be directed at specific green measures, such as the Just Transition Fund, sustainable infrastructure, rural development, home energy efficiency, circular economy and electric vehicle infrastructure.

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Capital market activity

Sovereign sustainable bonds

Issued? Yes

  • EU Support to mitigate Unemployment Risks in an Emergency (SURE) social bond

Type Social bond

Year issued 2020-21

Total issuance €89.6bn

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  • NextGenerationEU green bond

Type Green bond

Year to be issued 2021 (TBC)

Total issuance €250bn

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Green bond framework

Is there a local green bond framework? Yes

  • EU Green Bond Standard

Relevant authority European Central Bank and European Banking Authority

Sets a gold standard for how companies and public authorities can use green bonds to raise funds on capital markets to finance ambitious large-scale investments, while meeting tough sustainability requirements and protecting investors.

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