Banks, not investment funds, are responsible for financing the most carbon-intensive activities, the European Central Bank has concluded on the basis of experimental new indicators for sustainable finance. “The companies they finance produce relatively more emissions in their business operations to achieve a given level of revenue,” the ECB said when presenting the new indicators on Tuesday.
Referring to a lack of reliable data needed to track green and sustainable finance, the European Central Bank on Wednesday unveiled its own set of experimental new climate-related statistical indicators and analysis tools designed to narrow the climate data gap. A first conclusion is that banks finance the most carbon-intensive activities
“Preliminary results show that in the euro area, most of the emissions financed via equity or bonds are held by investment funds,” said the ECB. “However, the data suggest that the most carbon-intensive activities are financed via the banking sector.”
In a related publication, the Dutch central bank found that equity portfolios of Dutch pension funds and insurers have become considerably “greener” in the period 2017-2020. This is mainly because investee companies started emitting less carbon over the period, according to the Dutch analysis that complements that ECB’s new experimental indicators.
Absolute footprint decreased
The Dutch central bank analysed carbon footprint attributable to the investments of Dutch pension funds and insurers. Preliminary figures show the absolute carbon footprint of the equity portfolios of these institutional investors decreased in the period 2017-2020. Overall, the reduction over this period came to 36 percent for pension funds and 40 percent for insurers, although no adjustments have yet been made for price effects.
This decrease is mainly due to the fact that the companies invested in have started to emit less CO2, the Dutch central bank said. It is only partly due to adjustments in the investment portfolios, for instance by investing relatively more in cleaner companies instead of organisations that emit a lot of carbon, it said. For pension funds, two-thirds of the drop in absolute footprint came from fewer emissions on the part of investee companies.
Asked if similar data on investment and pension funds was available at a European level, a spokesman for the ECB said it is not yet the case. National central banks “remain autonomous to derive and release climate related indicators as they see fit, using in some cases superior national data sources that are not available internationally,” the spokesman said.
‘Patchy’ work in progress
The ECB said its new indicators will help analyse climate-related risks in the financial sector and monitor the green transition. Together with national central banks it expects to further improve these indicators to match quality standards of official ECB statistics. The initial data will still be “patchy and a work in progress,” said ECB board member Frank Eldersson.
“We need a better understanding of how climate change will affect the financial sector, and vice versa. For this, the development of high-quality data is key,” said ECB executive board member Isabel Schnabel. “The indicators are a first step to help narrow the climate data gap, which is crucial to make further progress towards a climate-neutral economy.”
The absence of accurate sustainability data has for long been a thorn in the eye of European asset managers, who - under the EU’s Sustainable Finance Disclosure Regulation (SFDR) - are required to report on the sustainability impact of the investment products they sell to investors.
Better data expected in coming years
For the coming years, navigating sustainability requirements will remain a challenge in which asset managers and investment funds are exposed to the risks of misjudging impact investments. Companies in which investment funds can invest only will be required to report their sustainability data as the new Corporate Sustainability Reporting Directive (CSRD) enters into force of the course between 2025 and 2029. Until CSRD is in place, asset managers have to find other ways to assess their green and sustainable investments.
In its presentation of the new indicators, the ECB referred to other initiatives that will generate data on green and sustainable finance, including the CSRD and European Sustainability Reporting Standards (ESRS) that “are likely to substantially increase the availability of granular, externally verified, corporate-level, climate-related information and should allow a better assessment of the exposures of financial institutions’ counterparties to transition and physical risk”.
Green bonds
The ECB’s indicators cover three areas. Experimental indicators on sustainable finance provide an overview of debt instruments labelled as “green”, “social”, “sustainability” or “sustainability-linked” by the issuer. The data show that the volume of sustainable and green bonds has more than doubled over the last two years and grew much faster than the overall euro area bond market.
The ECB said that a lack of internationally accepted and harmonised standards on what defines a green or sustainable bond makes the data less reliable overall. With its own indicators, it hopes to boost transparency and make it easier to track progress on the transition to a net-zero economy.