Key Regulatory Initiatives in EU Sustainable Banking
Exploring Sustainability Risk Management in the EU Banking Industry
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Abstract
With temperature exhibiting a growing trend and posing threats to future generations, the Paris Agreement set a cap level of no more than 2°C for the temperature increase, emphasizing the need for cross-national participation to combat climate change. At the European level, the European Commission pledged to make Europe achieve carbon neutrality by mid-century. However, to deliver on its commitment, extensive financial support and engagement from both private and public-sector players were acknowledged as requisites. Therefore, through their funding mechanism, banks assumed a leading role in financing the transition to a green economy. Yet, a new challenge of systemic nature – i.e. ESG risks – emerged, gaining regulatory attention and subsequently triggering numerous regulatory reforms. To date, the focus at the European level rests on the development of a comprehensive definition of ESG risks as well as of a system to identify activities in scope, i.e. the EU Taxonomy that can be nonetheless assessed as the core regulatory framework on which amendments that followed were based. To address the dynamics of the regulatory landscape and to ensure compliance, banks undertook several strategic changes. Not only that they adjusted the offered products and services, but they also amended their governance structures. Specifically, a clear shift could have been identified from employing profit maximization strategies to conducting activities that serve the interests of not only shareholders but a broader category of stakeholders including the general public as well as the surrounding environment. Following the implementation of sustainability-related strategic initiatives, changes in banks’ performance and their risk-taking capabilities could have been identified. Therefore, aiming to explore the extent to which ESG consideration can be considered as a strategic opportunity, or contrastingly a challenge, mixed opinions were acknowledged pointing towards the complexity of the topic at hand, complexities which are enhanced by the topic’s novelty as well as by the uncertain and convoluted nature of the EU regulatory environment addressing sustainability.