EU Taxonomy Application in Bank Lending

Scaling up sustainable finance worldwide is a challenging task, for which coherent definitions ofsustainability across jurisdictions and a higher degree of standardization and transparency on data arenecessary. The EU Taxonomy aims to provide a common language and thus clear guidance in line with Paris Agreement on which economic activities within Europe and beyond can be deemed environmentally sustainable, and to what degree. By doing so, the regulation delivers sustainable finance where it matters most.

What does the roll-out of the EU Taxonomy regulation in Bank Lending involves?

Such a roll-out includes analysis and understanding of customer segment specific data requirements, evaluation of projects based on the collected and verified evidence, subsequent reporting and provision of suitable trainings to our internal and external stakeholders. The latter ensures a uniform understanding of the EU Taxonomy requirements throughout the bank and thereby mitigates the risk of greenwashing. Automatization of the EU Taxonomy assessment within the bank across various customer segments represents another step towards alignment and simplification of the portfolio evaluation process, further enhances bank’s data reporting and prevents greenwashing.

What are the advantages of the EU Taxonomy integration in Bank Lending?

Eventhough implementation of EU Taxonomy regulation is a regulatory-driven process, it also represents a welcome challenge, one that increases the accountability and efficiency of bank’s sustainable lending practices. By providing a clear, science-based classification of economic activities, EU taxonomy tackles the “greenwashing” risk. The regulation could be further used to gather EU Taxonomy compatible information for banks clients who currently do not have an obligation to report, such as SMEs, non-EU companies, etc. Lastly, EU Taxonomy could be used by banks for client engagement: with clients whose economic activities are eligible for analysis under the EU Taxonomy but are not yet aligned.

What are examples of a common practical challenges of the EU Taxonomy integration in Bank Lending?

Initial identification of bank’s EU Taxonomy eligible exposure can be considered as a good example of a practical challenge. Even though usage of NACE codes has established itself as a common practice among market participants, NACE codes are to be understood as an indicative guidance only as they neither provide a complete overview of all eligible economic activities, nor reflect a detailed description of the activity, description of purpose of finance is what determines the eligibility, which requires analysis on a transaction-by-transaction level. Once an eligible exposure has been identified, next challenge arises - assessment of DNSH and MSS criteria as part of the EU Taxonomy check. Successful alignment with DNSH and MSS criteria heavily relies on data availability from the customers, which is currently rare due to the complexity of the criteria. One of the common approaches to address data unavailability and poor data quality, is to rely on the usage of estimates and proxies. Application of such an approach to a bank portfolio might beconsidered problematic and questionable, given that proxies and estimates are currently only allowed for exposure to non-EU transactions.