A lack of quality data is “the single biggest challenge” hindering the application of the EU Taxonomy by banks, according to a study involving 26 major European banks.
Participating banks in the pilot, which was led by UNEP FI and the European Banking Federation (EBF), have published eight recommendations as part of the exercise.
The EU’s ‘green’ classification system, which was adopted in June by the European Parliament and Council, is essentially a detailed list of economic activities that can credibly be called sustainable.
But, after testing the taxonomy against more than 40 live or recently closed transactions between March and August, the banks joined the growing call for better data in order to implement the framework.
Lack of data on EU-based companies is “largely” attributed in the report to the fact that the “taxonomy-linked NFRD [Non-financial Reporting Requirements Directive] reporting requirements are not yet applicable”. In other words, the rules that govern what companies should disclose are still being worked out, meaning financial players don’t have access to the relevant information yet.
One of their recommendations is that the NFRD should be changed from a Directive – a rule which can be interpreted and transposed differently by different EU Member States – to regulation – where the exact same rules apply across the EU – in order to limit “potential national interpretations and subsequent inconsistent implementation”.
Lack of taxonomy-relevant data is most acute with small and medium-sized companies (SMEs) and non-EU based assets, the study found, due to a lack of incentives for them to report against the EU Taxonomy.
The banks suggest offering “incentives tied to the use of the EU Taxonomy” as a way to “substantially boost its adoption by corporates, SMEs and financial market participants”.
Harmonisation of “existing national and regional taxonomies, including the EU Taxonomy” is also recommended by the banks, particularly via the International Platform for Sustainable Finance, the intergovernmental body launched in 2019 by the EU in a bid to reduce fragmentation as different jurisdictions began pursuing similar initiatives to ‘define green’ around the world.
One of the “most significant challenges” faced by the banks in the pilot was applying the taxonomy to “general purpose” loans and revolving credit facilities, which comprise most of a typical bank’s balance sheet.
“Loan proceeds used for general purposes undermine the assessment of alignment against the EU Taxonomy“, the banks said.
The report stresses that regulators should “tailor an approach to applying the EU Taxonomy suited to the specificities of core banking products and activities”.
“Our report for the first time analyses the Taxonomy from a banking perspective”, said Wim Mijs, Chief Executive Officer of the EBF. “One thing is clear: significant efforts will be required on all sides. We need to improve the data availability and we need lots of innovative thinking. This to make sure that the EU objectives of climate neutrality and those of the EU Green Deal are successfully met.”
A spokesperson for the Europe’s banking regulator, the EBA, which was an observer to the pilot study, told RI that: “The issues highlighted in the EBF report are important and the EBA has identified solutions to implementation challenges that can be applied at this stage, including the use of evidence-based proxies and estimates, which will be covered in forthcoming EBA reports and guidelines.”
“We appreciate the efforts made by banks in identifying potential uses of the Taxonomy and putting forward potential solutions to help implement this important tool going forward”, she added.
The recommendations in full
1. Take into account the specificities of core banking products which may limit a full application of the EU Taxonomy.
2. Ensure consistency and compatibility/comparability of criteria between the EU Taxonomy and other applicable legislation and regulations, including at national level.
3. Seek global alignment of taxonomies, facilitate international data collection and provide comparability mechanisms of criteria for applicability of the EU Taxonomy beyond EU borders.
4. Consider and seek to address the timing mismatch between corporate data availability and banks’ ability to apply and disclose against the EU Taxonomy.
5. Facilitate the collection and handling of data, through the development of tools to facilitate the application of the EU Taxonomy.
6. Owners of standards and frameworks, labels and certification schemes should clarify alignment with the EU Taxonomy.
7. Banks should start methodical data collection for taxonomy-relevant information as part of new origination, on a best effort basis, based on internal strategy and priorities.
8. Banks should devise industry guidelines for the implementation and application of the EU Taxonomy to core banking products, in conjunction with relevant industry bodies.