ESG ROADMAP 2022-2023: STAY AHEAD

But first, better would be to recap this year…

In 2022, banks have seen surging activity by the supervisors. One exercise was the ECB Climate Stress Test 2022, with the main results that:

• Around 65% of the banks scored poorly and showed significant limitations in their stress test capabilities.
• A large share of banks does not conduct in-depth climate risk stress tests as part of their ICAAP.

As a result, banks need to further improve their stress-test frameworks, data availability and modelling techniques.

The second milestone in the supervisor’s plan was the Thematic Review, which consists of an assessment done by the ECB within a peer group of banks. The review aims to establish whether banks are managing these risks in the way that supervisors expect them according to the 2020 ECB guide on climate-related and environmental risks (see 2020 ECB guide).

Regarding new delegated acts, a controversial topic was the addition of “fossil gas and nuclear energy activities” to the list of taxonomy-eligible activities for sustainable finance. The resulting delegated act will apply from 1 January 2023. These activities shall “only” be classified as “transitional activities” and can be “sustainable” under certain criteria (see the new Regulatory Technical Standards (RTS) under the SFDR by the ESAs)

The new year will see the first disclosure by all financial institutions complying with the EBA final draft, implementing technical standards (ITS) on Pillar 3 disclosures on Environmental, Social and Governance (ESG) risks. The disclosures will be based on 2022-year-end data. The standards put forward comparable disclosures and KPIs, including a green asset ratio (GAR) and a banking book taxonomy alignment ratio (BTAR). These tools will show how institutions incorporate sustainability criteria in their risk management, business models and strategy as well as their way to the Paris agreement goal.

Disclosures on sustainability metrics have also been at the center of political and industry debates. The main achievements and updates are:

The Corporate Sustainability Reporting Directive (CSRD), a landmark piece of legislation finalized by EU legislators in June 2022, will replace the current Non-financial Reporting Directive (NFRD). It introduces disclosure obligations including sustainability indicators relating to environmental protection, social responsibility and the treatment of employees, diversity and anti-corruption. To comply with CSRD requirements, EFRAG sustainability standards are being developed, with the first set of draft ESRS submitted to the European Commission on the 22 of November 2022.

Work is also continuing an ambitious project tackling responsible business conduct, called the Corporate Sustainability Due Diligence Directive (CSDDD). These rules will require companies to ensure that their own business operations and supply chains comply with extensive human rights and environmental criteria.

Regarding what’s left?
Several final reports from the Commission were expected this year but may be postponed:

• The TAX04 might be published at the beginning of Q1 2023 at the latest. Its final report from the Platform on Sustainable Finance (PSF) will contain preliminary recommendations for technical screening criteria for the remaining four non-climate environmental objectives.
• The Social Taxonomy, whose final report was presented in February 2022, will not materialize any time soon. The reason may be more political as member states seem to be already struggling to agree on an environmental taxonomy.
• The EU Platform very recently published its Final Report on Minimum Safeguards to help companies comply with Article 18 of the Taxonomy Regulation and the related recommendations on data and usability of the Taxonomy.

Finally, the renewed focus on greenwashing risks and the supervision of sustainable finance policies. Tackling “Greenwashing” will help promote transparency. Being one of the ESMA key priorities on its 2022-2024 Roadmap, the importance of the topic was highlighted by several alarming cases of Greenwashing in 2022.​​​​​​​​​​