Green Quadriga? - EU - Taxonomy, Non-Financial Reporting Directive, EBA Pillar III ESG risks and IFRS Foundation

After years of conceptual discussions, sustainability finance is uplifted to the execution agenda. Several regulators have been proposing or are proposing new requirements on sustainability reporting, ESG metrics and standardization of ESG disclosures. The EU-Taxonomy issued by the EU commission, the European Banking Authority (EBA) launches consultation on Environmental, Social and Governance (ESG) risks as well as the IFRS Foundation on sustainability reporting and the Non-Financial Reporting Directive(NFRD) also reflecting the European Green Deal (EGD). This research note assesses and comments these green initiates, which have different underpinnings and implications for market participants. In order to meet the EU climate and energy targets for 2030 and reach the objectives of the European Green Deal, it is fundamental to direct investments towards sustainable projects and activities. The current COVID-19 pandemic has reinforced the need to redirect capital flows towards sustainable projects in order to make our economies, businesses and societies, in particular health systems, more resilient against climate and environmental shocks and risks with clear co-benefits for health. To achieve this, a common language and a clear definition of what is ‘sustainable’ is needed. the EU Commission Non-financial Reporting Update (NFRD) however issues which are material to environmental and social objectives can have financial material impact. This is why the action plan on financing sustainable growth called for the creation of a common classification system for sustainable economic activities, or the “EU taxonomy”. The EU-taxonomy represents the most comprehensive classification schema for sustainability on a worldwide basis. The research note concludes with a summary of all four initiative and the assessment that the initiatives need to be coordinated and reconciled to each other, particularly the NFRD and the EBA Pillar 3 disclosures on environmental, social, and governance (ESG) risks.