On 29 January 2024, the EU Platform on Sustainable Finance, an advisory body to the European Commission published a report considering how the EU sustainable finance framework can support and inform the transition efforts of economic actors beyond mere regulatory compliance. It presents a compendium of early market practices, that participants are employing to transform business models and investments.
The market practices focus on:
- Business strategy, transition planning and target setting – how the framework is used to structure entity level transition plans and business strategies to achieve net zero by 2050.
- Finance and transactions -how EU sustainable tools are being adopted by financial and non-financial actors when structuring sustainable or transition finance solutions across a range of financial products and instruments, for example green and sustainability linked bonds, loans and investment funds.
- Reporting, monitoring and assurance – the state of reporting by financial and non-financial actors and the processes in place to conduct appropriate data collection and verification.
The market practices reflect the contributions of seven stakeholder groups, including:
- Large corporates – The EU Taxonomy key performance indicators (KPIs) are used for target setting and providing strategic guidance for transition planning. The EU Taxonomy and EU Green Bond Standard are used to back up claims of sustainability performance and improve comparability. The EU Taxonomy helps in accessing a broader and more diverse investor pool and deepen market engagement.
- Credit institutions – Credit institutions incorporate the EU Taxonomy in lending strategies and use it in their assessment of capital expenditure plans to evaluate clients’ transition readiness. The EU Taxonomy is being integrated into ESG risk management and credit decision-making processes. Taxonomy alignment can be used to provide better pricing conditions or access to finance.
- Investors – Investors can assess companies’ alignment with net-zero targets, which complements voluntary industry guidance and structure, driven by the Sustainable Finance Disclosure Regulation.
- Insurers – The EU Taxonomy is being referenced in new green non-life insurance solutions. Its criteria provide incentives for insurers that progressively transform their activities to deal with climate change adaptation. The EU Taxonomy is seen as a useful tool to improve understanding among stakeholders and increase comparability of insurance solutions.
- Public institutions – As best practice for classification and reporting, the EU Taxonomy can improve the identification and promotion of best-in-class practices.
- Auditors and consultants – Auditors observe that the EU Taxonomy has led to a shift in mindset for many companies, which are transitioning from general sustainability related commitments and declarations to specific, defined KPIs.
- SMEs – Taxonomy disclosures can increase management’s focus on sustainability aspects of the business, through promoting engagement around green finance and improving companies’ access to private capital and lending opportunities.
The seven stakeholder groups propose peer-to-peer recommendations and invite market actors to share their financial practices with the EU Platform on Sustainable Finance. The findings and recommendations in the report will inform the Commission’s work to further enhance the uptake of the EU sustainable finance framework.