Fostering clarity in sustainability

As Europe's 'climate bank' the European Investment Bank (EIB) has spent the past year accelerating its sustainable finance initiatives and aligning its activities with both the Paris Agreement and the upcoming European Union's (EU) taxonomy for sustainable activities. Environmental Finance spoke with the key individuals leading this work at the bank to discuss what has been achieved and what this means for capital markets

Aldo RomaniThe EIB has maintained and achieved ambitious climate action targets for almost a decade. The EIB's pledge in 2019 to align all of its financing activities with the Paris Agreement by end 2020 was nothing short of a colossal commitment.

More recently, the EIB has been working towards the delivery of its sustainability financing strategy within the European Green Deal – the EU's plan to make the EU's economy sustainable.

To achieve this, the need for a common language and a clear definition of what is 'green' was identified by the European Commission, leading to the creation of a common framework for the classification of economic activities making substantial contribution to EU environmental objectives: the EU taxonomy regulation. This regulation is now law, with a first proposal for an EU taxonomy for climate objectives published in 2020.

The EIB responded to these regulatory and technical developments with a pledge to effectively transform itself from "an EU bank supporting climate" into "the EU climate bank".

In November 2020, the EIB published its Climate Bank Roadmap 2021-2025, which outlines its goals for aligning its activities with the Paris agreement.

"The Climate Roadmap provides the framework for all our issuance and investor work," says Aldo Romani, head of sustainability funding at the EIB. "The EIB plans to take the green share of its new lending to over 50% of the total by 2025; it will also align its tracking methodology for green finance with the framework of the EU taxonomy regulation. In other words it will measure results using the classification framework that the European Commission has established for the market."

EIB also plans to gradually align its two sustainability funding products – Climate Awareness Bonds (CABs) and Sustainability Awareness Bonds (SABs) – with the proposed EU Green Bond Standard, which requires alignment of the use of proceeds with the EU taxonomy regulation.

Not only were the EIB's CABs the world's first green bonds, the EIB has now also become the first issuer to tune CAB- and SAB-documentation to the EU taxonomy regulation. In this

way, the EIB will be able to reflect the ongoing developments to the capital markets via the progressive extension of CAB and SAB eligibilities – thereby extending the sustainable activities that they can cover.

"These commitments are essential because they crystallise the initiatives that the sustainability funding team has been working on in close cooperation with the projects directorate for the past three or four years," says Romani. "The extension of CAB and SAB eligibilities has permitted us to more than double our issuance in these two instruments last year compared with the year before. We issued €10.5 billion ($12.6 billion) which was 15% of the total programme."

CAB/SAB issuance and its share in EIB's total funding programme

CAB/SAB issuance and its share in EIB’s total funding programme

It is in this unleashing of issuance that Romani sees the merits of the EU taxonomy regulation.

"It is an enabling framework that permits issuers to better articulate their sustainability efforts and for investors to implement environmental, social and governance (ESG) investment strategies," he says. "It is also an empowering framework that permits us to undertake initiatives in a systematic manner."

The EIB's course of action is to prove on the ground that "it is possible to improve clarity in sustainable finance," says Romani, particularly now that the first set of technical screening criteria for the EU taxonomy is about to be adopted by the European Commission.

In the meantime, Romani says the EIB is already taking the recommendations of the European Commission's Technical Expert Group (TEG) of March last year as a reference for the new CAB-eligibilities established in 2020.

"Our project experts are following the logic of the taxonomy regulation. This provides an opportunity to communicate with the market in an accountable and transparent way where the EIB is going and how it plans to proceed," he says.

"For the first time, it is possible for the market to refer to an organic framework as a touchstone and for issuers to prove their sustainability statements. This is very important as the EU taxonomy regulation provides not only a yardstick for action but also a yardstick for judgment. Issuers can now increasingly identify and communicate the objectives that they want to pursue and how they measure substantial contributions against them," he adds.

Romani is certain that this systematic approach will help capital markets identify what is important and material with regards to not only climate change mitigation and adaptation but also other environmental and social objectives.

In the last quarter of 2020 alone, he has seen the quality of dialogue with investors increase enormously as the EIB was able to detail the substance of its initiatives with reference to the EU framework.

More generally, Romani also expects such developments will allow for the more efficient functioning of capital markets.

"I am a big believer in the fact that once you have a framework, you can take initiatives forward and do something meaningful. These 'rules of the game' will help markets to work better because they will enhance knowledge on all sides and permit a better interaction between issuers and investors. As a result, markets will become more efficient, as issuers and investors will be able to focus on what is important and investors can establish informed investment guidelines."

The technical screening criteria are a particularly important component of this process, he says.

"You need to establish a baseline that cannot be tweaked. The screening criteria provide thresholds that can then be used as a baseline from which to measure deviation. What we are talking about here is a comparability of logic and a common language."

This is especially key for climate transition strategies where progress can be monitored against what is compatible with certain objectives that are embedded within the taxonomy regulation, he says.

"If you do not have these references then you cannot measure additionality and improvements over time. People now have the possibility to combine economic rationality with an agreed upon value for society. There are no excuses now anymore and I think everyone will agree, in fairness, that this is a very positive development that we all need to support."

Trends for sustainable debt markets

Environmental Finance: What regulations and market dynamics are shaping sustainable debt markets?

Eila KreiviEila Kreivi, head of capital markets: After five to seven years of the green bond market growing, becoming more global, and more players entering the market, people want a definition of what is green. However, we have seen that different regions may want to define 'green' differently and so there are several initiatives underway around the globe. Some are voluntary, some are regulated, and some are related to the EU's efforts to establish a taxonomy. Europe has been a trailblazer on this front but there is plenty more work to do. It is complex, but the world is complex.

EF: What have been the EIB's most important recent innovations in terms of sustainability criteria and issuance? Do you have any lessons for the wider market?

EK: Our recent innovations are a continuation of what we have been working on for many years. One of the most important steps on this path has been the linking of our sustainability funding to the taxonomy regulation. We are committed to follow it and we are doing this on both sides of the balance sheet. We were one of the first to commit to this and now others are following suit.

Our advice to the wider market is "strive for good quality". It is not always possible to achieve perfection and it is not always an exact science. Do what you can in the best possible way and in a transparent manner. We have the definitions, and now we must use them.

The EIB's advisory role

EF: What benefits and challenges do you see for market participants from the new EU Sustainable Finance regulations?

Peter MunroPeter Munro, head of investor relations, sustainable capital markets & advisory: For a long time, the market has been asking for definitions of green and better data quality. With the advent of the taxonomy regulation and sustainability disclosure obligations, we are starting to resolve those concerns.

As with anything new, the challenge is in the implementation. In the EU sustainable finance architecture, there are several moving parts that make it challenging in some ways. Fundamentally, the clarity on definitions of green is a positive development that should enable us to move forwards. On the other hand, that raises technical challenges that we are looking to resolve in cooperation with our clients and the wider market.

EF: How is EIB helping clients and the wider market to adapt to the EU taxonomy?

PM: The EIB has recently used its advisory service to help clients – especially those in the banking sector – who are looking to adapt to the EU taxonomy.

There has been a very positive response to that service, and we intend to scale it up as a consequence. We are also about to extend our coverage to include support with the structuring of sustainable financial products. Initially, this will be for mid-size corporates and potentially sub-sovereigns.

The EIB is committed to aligning its new business with the Paris agreement and we think we can support and accompany our clients to take the necessary steps to ensure Paris alignment for their projects as well.

Focus on taxonomy

EF: What are implications for the EU taxonomy on a global scale?

Nancy SaichNancy Saich, chief climate change expert: It is a game changer. To be counted as green an investment must not only be making a substantial contribution to environmental objectives, but it must also not be causing significant harm to other environmental objectives. It must also meet minimum social safeguards. It supports robust approaches for Paris-aligned financing because it sets out clear criteria for investments, to assess compatibility with low carbon pathways, and address climate change impacts and material climate risks.

Secondly, the screening criteria allow entities to report against standardised, mainly quantitative, science-based technical criteria. Previously, the most widely referred to common definitions for mitigation finance were the 2015 Common Principles for Climate Mitigation Finance Tracking, which allowed financiers to define substantial contributions with their own metrics.

The world is watching the development of the EU taxonomy, but the EU knows this must be an international discussion. Therefore, the European Commission and others launched the International Platform for Sustainable Finance. It is important to remember that the taxonomy is not meant to do everything for everybody – it is however a powerful tool for a common sustainability language that can be referenced by the whole sustainable finance system.

EF: How important are taxonomy criteria for transition strategies?

NS: Very. There seems to be some misunderstanding that the taxonomy does not address this. The TEG spent a lot of time on transition discussions.

The taxonomy identifies 'transitional activities' and 'enabling activities' so that companies and entities can plan their green transitions. Importantly, economic activities can raise finance and attract investment for improvements – provided that the enabling activity measures, such as investments for energy efficiency, make a substantial contribution, do not cause significant harm, and meet minimum social safeguards.

The TEG recommendations have enough flexibility to allow transition to happen over a period of time. But obviously it is still a very hot topic and that is why the Commission has recently asked the EU Platform for Sustainable Finance to look at how the taxonomy can be used to support transition in different sectors.

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Contact: Tina Wintersdorff