@ Guillaume Périgois
The EU needs to increase transparency to facilitate more capital into green projects, but the complexity of current regulation around climate disclosures could hinder the effectiveness of such efforts, a European Central Bank (ECB) research paper finds.
“The significant complexity of the regulatory framework may affect its overall effectiveness,” the paper states, referring to various EU green legislation, including the corporate sustainability reporting directive, EU taxonomy and sustainable finance disclosure regulation.
Having so many parallel disclosures has led to a “complex framework, with duplications and occasional inconsistencies”. It not only presents a compliance issue but could also deter investments in green projects, the paper finds.
While the paper calls on streamlining regulations, it should be done “without backtracking on the fundamental objective of enhancing sustainability transparency”.
EU commission president Ursula von der Leyen has said she would simplify the framework after many businesses complained the regulations were too burdensome and fail to give Europe a competitive edge. A rise in right-wing politics has also increased scepticism in the EU around environmental regulations.
Pierre Monnin, a senior fellow at the Council on Economic Policies, said it was important to note that the ECB’s findings emphasise the importance of not backtracking on increased transparency.
If the regulations are simplified, reporting standards should still provide the information supervisors need to assess the financial sector’s climate risk exposure, Monnin said. Having this information allows supervisors to know if the financial system is aligned with transition goals or if they are fuelling system climate risks and financial stability, which is part of central banks’ core mandate, he said.
“If complexity is needed to provide this information, then it should not be abandoned for simplification.”
The ECB paper stresses the need for more finance and the role that both public and private investments have in the transition to a green economy. Banks in particular play an important role and may have already started to reflect climate risks in their loan approvals.
“While low-emitting firms and firms in transition appear to receive a climate discount in their bank lending conditions, credit standards for high-carbon emitters are tighter and they are charged higher lending rates,” the paper says.
According to a number of assessments, the EU will need to increase investment to meet its climate goals. The European Commission estimates that an additional €477bn per year is needed, while other institutions estimate €403bn to €558bn are needed.
The paper also states the importance of transition finance should be better recognised, as the current high bar for sustainable classification could disincentivise firms from investing in green activities.
The enforcement and supervision of disclosures is also a challenge for regulators, as the data is presented as public disclosures rather than being reported to relevant authorities.
“This makes the enforcement and supervision of the disclosures more arduous,” and makes data quality assurance challenging, as access to the information in one location won’t be possible until 2027 when the European single access point is live, a centralised data hub which will include publicaly available information on EU companies and investment products.
This page was last updated January 17, 2025
Written by
Moriah Costa is the Editor-in-Chief of Green Central Banking and has over a decade of experience writing about banking and finance. She is an award-winning American journalist based in Paris and has written for major international publications, including Reuters, The Guardian, and S&P Global. Having grown up in water-stressed Arizona, she has always had a strong interest in bringing awareness to climate and environmental issues.
