Insights Blog

July 2022 has seen a number of significant financial services-related developments in the ESG space.


Reflecting the ongoing focus on how best to combat greenwashing, the European Commission asked the EBA, ESMA and EIOPA (ESAs) to report on greenwashing and greenwashing risks, and on the implementation, supervision and enforcement of sustainable finance policies aimed at preventing greenwashing.  It is looking for coordinated progress reports by May 2023, and final reports by May 2024 (to give enough time for key EU legislative measures in the sustainable finance space to come into force).  In its request for input, the Commission emphasised the importance of reaching a ‘common high-level understanding of the key features of … greenwashing’, and of understanding whether national competent authorities’ supervisory mandates are sufficient to enable them to monitor, investigate and sanction greenwashing.  The Commission has asked the ESAs to flag any related shortcomings in the current legal framework for sustainable finance, and will also consult other stakeholders. A decision will be made on whether any legislative changes are needed once the Commission reviews the ESA’s reports.

Taxonomy Regulation

The Commission’s legislative proposal for a Complementary Climate Delegated Act setting out the conditions under which natural gas and nuclear energy activities can be included in the list of economic activities covered by the EU Taxonomy Regulation passed a vote in the European Parliament on 6 July 2022.  

As the EU Council did not formally object to the proposal by the 11 July 2022 deadline, it will enter into force 20 days after its publication in the Official Journal and apply from 1 January 2023.

EU Green Bond Standard

Trilogue negotiations on the proposed EU Green Bond Standard began this week (12 July 2022). 

Our latest update on the proposal is here: EU Green Bond Standard: State-of-play

Results of 2022 Climate Risk Stress Tests

The ECB published its report setting out the results of its 2022 climate risk stress test, together with a press release, presentation, condensed presentation and FAQs

Approximately 60% of the 104 ‘significant’ banks that participated in the stress test do not yet have a climate risk stress-testing framework in place – the ECB is planning further in-depth analysis of banks’ stress test submissions to identify best practices and recommendations for banks as to how to overcome key obstacles to developing those frameworks.

The stress test also showed that banks generate around 65.2% of their income from 22 climate-relevant greenhouse gas (GHG)-intensive sectors.  Most of that income is generated from the less carbon-intensive of those sectors (e.g. real estate), but higher carbon-emitting sectors still account for 21% of reported income.

The importance of closing data gaps was also emphasised by the ECB – while many banks rely on proxies to judge their exposure to carbon-intensive sectors, the ECB wants to see more direct engagement by banks with their customers to allow them to obtain more accurate data and insights into their clients’ transition plans.

An additional bottom-up stress test for a subset of 41 directly supervised banks required those banks to project losses in extreme weather events (drought and heat, and flood) and under transition scenarios with different time-frames.  That test estimated credit and market losses of around €70 billion in aggregate for the in-scope scenarios.

Looking ahead, the stress test results will not have any direct capital impact but will feed into the ECB’s Supervisory Review and Evaluation Process from a qualitative perspective. The ECB has provided feedback directly to all participating banks and will continue to monitor progress. It also plans to publish a set of best practices in Q4 2022.

The ECB and Climate Change 

The ECB is also taking climate change into account in its approach to monetary policy.  It plans to ‘tilt’ its corporate bond holdings towards companies with a better climate performance (measured by reference to lower GHG emissions, more ambitious carbon reduction targets and better disclosures) through reinvestment of the large redemptions that it expects over the coming years. It will also limit the share of assets issued by entities with a high carbon footprint that can be pledged as collateral by individual counterparties when borrowing from the Eurosystem (with an initial focus on non-financial entities).  

Once the Corporate Sustainability Reporting Directive (CSRD) is implemented in full, the ECB will only accept marketable assets and credit claims from in-scope entities that are CSRD-compliant as collateral in Eurosystem credit operations.  As asset-backed securities and covered bonds are not within CSRD’s scope, the ECB will look further at how to ensure that climate-related financial risks for those assets are properly assessed.

If you would like to discuss any of these developments in more detail, please get in touch with any member of our market-leading cross-disciplinary ESG Group.