As the fourth edition of the Siena Conference on the Future of Europe is approaching (8-10 June 2023), Vision is organizing four webinars to start the conversation on the topics that will be addressed by the "problem-solving groups" during the Conference.

The third webinar will be held on 25th May, 6pm CEST, and will address the following topic:  "The advantages and disadvantages of being the forerunners on sustainable finance: is there a way to make the EU ESG/Green ratio regulations more efficient?"

HERE you can find the link to follow the webinar on 25th May.  

In order to prepare for the webinar, here is some background information (PDF version): 

According to the International Energy Agency (IEA), in order to achieve the decarbonisation targets established by the recent Conference of the Parties (COP 27), the world should commit about 4 trillion dollars to low carbon energy every year for the next eight years, which would require an immense reallocation of investments towards less polluting activities. And yet this could also be the “mission” that sparks innovation in those financial institutions that did not fully recover from the 2008 crisis. The myopic vision of financial markets often collides with the long-term returns of climate-mitigative investments, making finance a powerful tool in need of adjustments.

There are already practices¹ that companies use to include their sustainability assessment in their financial statements, at times used primarily as a marketing strategy. Nowadays, however, the idea that sustainability and corporate responsibility may be the key to financial survival is slowly settling in. The key flip side of this question concerns the extent to which corporate responsibility and financial investment can enable or hinder environmental survival.

The EU is the first supranational organisation to develop a full mandatory regulation² aimed at measuring the extent to which firms’ balance sheets are dedicated to so-called Environmental, Social, and Governance (ESG) purposes. Its Corporate Sustainability Reporting Directive is the third pillar of the EU’s sustainability reporting framework and is aligned with the EU’s Taxonomy (the second pillar) of sustainable activities that support the goals of the Paris Agreement. The first pillar concerns sustainability labelling to increase the transparency of financial actors and sustainable investment products and prevent greenwashing. The implementation of ESG disclosures under the third pillar will be supervised by the European Banking Authority (EBA).

The third pillar of ESG disclosures mandated by the EBA consists of the following elements from financial institutions³:

• The climate or environmental impact of assets and collateral, and the impacts of climate change on these.
• Actions (loans and investments) that support the ‘green transition’ and climate change mitigation and adaptation, but do not meet the criteria of the EU’s Taxonomy of sustainable activities.
• The Green Asset Ratio (GAR) and the Banking Book Taxonomy Alignment Ratio (BTAR): the share of investments in large public investment firms (in the case of the GAR) and other corporations (in the case of BTAR) financing activities that meet the EU Taxonomy.
• Qualitative disclosures on ESG risks, including governance, risk management, and business strategies.

By monitoring banks’ investments, and in turn the activities of the corporations in whom they invest, the EU’s ESG regulation (as part of the EU’s Just Transition Mechanism and its overarching Fit for 55 policy) can enable targeted investment in decarbonisation, through energy efficiency, renewable energies, and electrification, and in the surrounding social and environmental sustainability, both at the EU level and globally, but can also create mechanisms that put local stakeholders and climate mitigation outcomes at risk of speculative behaviour.

A key mechanism in global decarbonisation involves carbon trading, whether through compliance/obligations (such as the European Emissions Trading System (ETS) or through voluntary carbon markets (VCMs). Financial intermediaries play a significant role in the EU ETS (Betz et al., 2022; Borghesi and Flori, 2018). The real question concerns their role in terms of speculation on carbon pricing (Quemin and Pahle, 2022). At the economic and regulatory levels these raise essential challenges for implementers of carbon mitigation, and for organisations investing in these projects as part of their ESG targets. A failure to address these challenges would hinder the transition of ESG from claims and promises to real climate mitigation outcomes.

1. Scientific integrity.  Claims regarding the Green Asset Ratio, decarbonisation, or biodiversity must be both as widespread and as accurate as possible, raising questions of how to make measurement transparent, efficient, and economically accessible to all actors. The EU’s Green Claims Directive pushes actors to transparently declare their own carbon mitigation as distinct from mitigation executed by other actors bought through carbon offset credits on voluntary carbon markets. Inconsistencies in the actual implementation of carbon mitigation projects, and in the tracking of their credits, leads to false calculations of mitigation and can worsen, rather than improve, behavioural shifts. How should the system a) render independent auditors accessible, and b) how, if at all, can it ensure the independence and scientific soundness of these auditors? What are the limits on ESG regulations preventing greenwashing?
2. Social integrity. The movement towards carbon mitigation must be driven by national and regional policies, but implemented with local environmental knowledge and implemented by local actors. Without these, promises of carbon mitigation risk not being met by sufficient mitigation projects, or the ability or will to implement them, or risk being implemented in ways harmful to local communities and environments. What elements are needed to create a cycle of a) local input into standard setting, and b) local translation of the resulting policies and measurements?
3. Financial markets. There is growing research on the role of the financial derivatives market for carbon credits (Spilker and Nugent, 2022). The integration of this market into carbon mitigation measures can offer a driving force for the private sector and can signal faith in the mechanism, but can also put carbon mitigation initiatives, and the livelihoods of those working on them, at risk of speculation and failures that jeopardise their outcomes. How will high interest rates affect the diffusion of green innovation? How much of the current carbon price increase might depend on speculative activity? What are the (research/regulatory) gaps we still need to fill in this area?
4. Technology. The development of blockchain technology has the potential to transform the current model of carbon trading by reducing opacity, decentralising market activity records, and consequently increasing integrity. It can integrate accounting for Nationally Determined Contributions (NDCs) through Corresponding Adjustments (CAs), thereby aligning the voluntary and compliance markets. Additional layers can include forecasting and credit ratings to plan for policy contingencies and hold actors accountable. What are the a) risks, and b) key steps for the implementation of effective technologies for carbon mitigation?

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¹ In 2016, The Global Reporting Initiative (GRI), an NGO that collaborates with the United Nations, presented a methodology to measure how much a company damages social value. Two years later, non-financial accounting standards (SASB) were included next to traditional accounting standards. This allowed investors to compare how much different companies include those principles in their actions. 

² European Banking Authority. (2022). Environmental and Social Governance: Pillar 3 Disclosures (link).

³ European Banking Authority. (2022). Summary of ESG Disclosures - Pillar 3 (link).