Stockholm (NordSIP) – At the end of January, the EU’s Platform on Sustainable Finance published a compendium of market practices regarding the use of the EU taxonomy and the European Green Bond Standard for setting transition strategies, structuring financial transactions and reporting on sustainability efforts. According to the Platform’s assessment, “the EU sustainable finance framework is being picked up by different market actors as an effective toolkit to navigate the transition to net zero.”
The report on “a compendium of market practices” focuses on seven stakeholder groups (corporates, credit institutions, investors, insurers, auditors and consultants, small- and medium-sized enterprises, and the public sector).
Corporates Benefit from EU Taxonomy and EU GBS
According to the Platform’s compendium, the EU Taxonomy and the EU GBS play provide assurance, transparency and credibility to both issuers and investors, with more and more companies and banks referring to the Taxonomy or GBS when structuring sustainable debt instruments and products.
Nevertheless, there remains a wide range of approaches to how these references are made. Some only draw parallels with economic activities identified as sustainable by the EU Taxonomy, others measure and report alignment, while others still set related targets.
SLBs and SLLs Remain Remain a Challenge
This is expected to develop in the coming years, as the volume of EU Taxonomy reporting data increases and as the EU GBS becomes operational in fixed income markets. According to the Platform’s report, “market practices suggest an appetite and need for green and sustainability-linked bond and loan [SLL and SLB] products from banks for companies, while also acknowledging that the credibility and transparency of such products remain a challenge, as in many cases the products do not specify an annual trajectory towards sustainability performance targets.”
The Platform singles out SLLs and SLBs as being “less standardised and mature” and in some cases lacking in transparency, which can be an obstacle to “tracking of sustainability performance and progress overtime.” The report cites an analysis of 191 sustainability-linked bonds by SEB, which found that issuers were not on track to meet around a third of the KPIs within their bonds.
Investors Focus on SFDR, PAIs and CSRD
Regarding the use of these tools by investors, the Platform’s compendium highlighted the rise in investment funds classified as Article 8 and Article 9, according to the EU’s Sustainable Finance Diclosures Regulation (SFDR) and the use of Principal Adverse Impact (PAIs) indicators among other topics.
According to an October 2023 Morningstar study cited in the compendium, funds disclosing under Articles 8 and 9 of the SFDR now account for 53% and 3% of total EU fund assets, respectively. The same Morningstar study found that although only 1% of Article 8 products had set carbon reduction objectives in October 2022, by September 2023 this had increased to 10%. The platform speculated that “this trend may reflect the implementation of entity-level net-zero commitments by investors within their financial products.”
Further taking stock of the state of play, the Platform’s compendium notes that 79% of the US$120 billion worth of assets invested against the Paris-aligned and climate transition benchmarks are still only classified as Article 8, despite an April 2023 European Commission clarification that passive funds can also be classified as Article 9 under SFDR.
One front where the EU’s sustainable finance framework has seemingly proved to be very useful is in the use of Principal Adverse Indicators (PAIs). Citing a July 2023 MSCI analysis, the Platform notes that “PAIs tend to be more focused on ‘involvement-type’ PAIs, which show a company’s exposure to a given economic activity. For example, 80% of funds considered exposure of companies to the fossil fuel sector and 93% considered exposure to controversial weapons.”
Going forward, the Platform notes that “it is expected that the entry into force of climate transition plan disclosure requirements as part of CSRD ESRS E1.1 and the CSDDD21 will help investors improve their assessment of companies’ transition strategies through increased transparency and standardisation. Investors also expect to increasingly leverage the EU Taxonomy to support more robust, comparable target-setting for climate solutions across asset classes, using equivalent frameworks in other geographies to assess non-EU based investees.”
