This blog was published on 09 July 2021.

At a glance

    • The European Commission’s (EC) Strategy for Financing the Transition to a Sustainable Economy is relevant to all financial services firms and to ESG ratings providers and credit rating agencies. The strategy sets an ambitious agenda for action on sustainable finance, incorporating more than 80 policy actions. 
    • Since it published its first sustainable finance action plan in 2018, the EC recognises that its understanding of what is needed to meet the sustainability goals has evolved and the global context has changed. The new strategy builds on its 2018 action plan and also sets new objectives on: (i) financing the transition to sustainability; (ii) inclusiveness; (iii) financial sector resilience and contribution; and (iv) global ambition. 
    • Considered in aggregate, the strategy reinforces the need for firms to map out a comprehensive and credible plan detailing the steps that need to be taken to develop the tools, capabilities and frameworks necessary to be able to meet regulatory expectations alongside their organisations own sustainability ambitions. With regulatory expectations continuing to evolve, that plan needs to consider where requirements that the EC signals will be developed in the future (for example, on biodiversity risk) can be anticipated in current design and development decisions.
    • Of particular note from the initiatives included in the strategy are: 
    • A new focus on the transition to a more sustainable economy. The EC plans to increase scrutiny of FS firms’ net zero commitments. Greater recognition of the importance of transition finance is also key, and the EC proposes extending the scope of the EU Taxonomy and the framework for sustainable finance standards and labels to achieve this. It will also broaden the adoption of the “double-materiality” risk perspective, so that firms consistently assess the impact of their actions on sustainability in addition to the impact of the actions of others.
    • An update to the regulatory and supervisory framework underpinning the EU’s response to climate change: formalising risk management requirements for banks and insurers through prudential regulation and instituting business-as-usual climate risk stress testing. Despite fast tracking of an existing EBA mandate related to topic, the EC’s strategy effectively confirms that the introduction of capital ‘green supporting factors’ for banks or insurers will not happen before at least 2023 - if it happens at all.
    • An intensification of engagement on natural capital and biodiversity, which points to regulatory and supervisory activity on these topics increasing in the coming years. The strategy also includes proposals in relation to ‘greenwashing’, transparency of the sustainability of exposures, and convergence in ESG ratings.

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 On 6 July, the European Commission (EC) published its Strategy for Financing the Transition to a Sustainable Economy, providing a roadmap of the actions the EU plans to take over the next two and a half years to:

  • Finance the transition to an environmentally sustainable economy;
  • Ensure inclusive access to sustainable finance;
  • Ensure the financial sector itself changes to meet the EU’s Green Deal targets; and
  • Foster and promote an international consensus for an ambitious global sustainable finance agenda.

The document builds on the EC’s 2018 Action Plan on financing sustainable growth.

The strategy is ambitious and transformative. The 81 policy actions it sets out (some of which have previously been announced) will affect all financial services firms as well as ESG ratings providers and credit rating agencies, touching on strategy, governance, disclosures, risk management, capital, and products and services.

This blog highlights the themes from the strategy that will, in our view, have the most significant impact on financial services firms. The blog also draws comparisons between the EC’s publication and initiatives recently announced by UK policymakers, including in HM Treasury’s ‘New chapter for financial services’ policy paper. We also include a timeline of the key policy actions contained in the Annex to the Communication (see attachment).

Assessing credibility of net zero pledges 

The EC will examine the credibility of financial services firms’ net zero pledges, in particular the extent to which further guidance is necessary to ensure that firms’ voluntary pledges are credible and measurable. Notably, in the UK the Chancellor of the Exchequer announced last week alongside HMT’s policy paper that the Government would work with regulators to encourage and support firms as they publish transition plans.

Embedding “double materiality” consideration of risks

The EC also has a broader ambition to embed the concept of “double materiality” in requirements. Double materiality entails considering both “outside-in” (how sustainability exposures affect the firm) and “inside-out” (how the firm’s activities affect sustainability) ESG risks by firms across financial decision-making processes.

The double materiality principle is already present in parts of the EU’s sustainable finance framework – the EC plans to promote a consistent approach both at the EU level and globally. The EC will suggest that the Financial Stability Board (FSB) expands its mandate in order to integrate the double materiality perspective – which was not a feature of the work of the FSB’s Taskforce on Climate-related Financial Disclosures (TCFD) - but has been adopted more recently by the Taskforce on Nature-related Financial Disclosures (TFND). At the EU level, the EC will ask EIOPA to introduce the notion of double materiality into the pension framework; and will strengthen its cooperation with other EU institutions in order to integrate the double materiality perspective across the EU financial system.

Moving to business-as-usual climate risk stress testing and enhancing the macroprudential policy toolkit

The strategy confirms that EU firms should expect climate risk stress testing to become part of business-as-usual supervisory processes. The EC will mandate the European Supervisory Agencies (ESAs) and ask the ECB to perform regular ‘bottom-up’ climate change stress tests and ‘top-down’ scenario analyses; and to develop further the methodologies and scenarios for doing so building on the work of the Network for Greening the Financial System (NGFS)).

The ECB and ESAs will also conduct a coordinated, cross-FS, ‘bottom-up’ and ‘top-down’ one-off exercise to assess the resilience of the whole financial sector to climate change. The timing, scope and sector specific aspects of this exercise will be defined by the ESAs and the ECB. In addition, the EC (with the ECB, European Banking Authority (EBA) and European Systemic Risk Board (ESRB)) will assess whether the current macroprudential toolkit is suitable to address climate-change related financial stability risks and consider a legislative proposal as part of an upcoming review of the banking macro-prudential framework.

Integration of ESG risks into the prudential regulatory framework for CRR firms and insurers

The EC will use the upcoming reviews of Solvency II and the Capital Requirements Directive and Regulation (CRD/CRR) to improve insurers’ and banks’ climate risk management. Both Solvency II and CRR will include new requirements to conduct internal climate risk stress tests/scenario analyses. Banks will be set new requirements for the integration of ESG risks in their risk management frameworks (with the EBA due to receive a mandate to further detail its expectations). For banks, the effect of this will be to extend climate risk management requirements to all EU banks (currently, guidelines set by the ECB only apply to the largest euro area banks, although the ECB has encouraged euro area National Competent Authorities (NCAs) to also apply its guidelines).

Banking supervisors will also be given additional powers to incorporate ESG risks into the supervisory review process (SREP). The ECB has previously made clear that it will include ESG considerations in the SREP. These powers will enable NCAs to adopt a similar approach, likely building on the framework set out by the EBA in its recent report on management and supervision of ESG risks.

The EC’s strategy also reflects on exploring the feasibility of a dedicated prudential treatment for ‘green’ activities (for banks and insurers). The EC will bring forward the timing of the EBA’s mandate to publish a report on the prudential treatment of assets associated with ESG objectives from 2025 to 2023. EIOPA will also be mandated to publish a report on the same topic from an insurance point of view by 2023. For banks, whilst this change in timing is important but also means that we will still not see the inclusion of any ‘green supporting factor’ in CRR3/CRD6. The EC will though recognise in CRR3/CRD6 that measures to enhance the energy efficiency of mortgage collateral unequivocally increase property values; and it will ask the EBA to explore possible supporting tools for green retail loans and green mortgages.

Intensifying engagement on biodiversity and natural capital

Biodiversity loss and ecosystem degradation are accelerating. Alongside climate change, these developments are critical drivers of environmental risk for firms (the ‘E’ in ESG). Moreover, the reversal of biodiversity loss and ecosystem degradation are collectively one of the EU’s commitments in the European Green Deal.

To encourage the development of standards for assessing natural capital in the EU and globally, the EC plans to intensify its engagement with industry on biodiversity risks and natural capital accounting. By 2022, the EC will publish a report presenting a methodological framework and assessment of the potential financial risks associated with biodiversity loss at both a micro and macro level, and explore the potential policy changes needed. In addition, the International Platform on Sustainable Finance (IPSF) will propose expanding its work to include issues such as biodiversity.

These steps by the EC mirror actions being taken globally. In June, G7 leaders committed to “conserve and protect at least 30 percent of our land and oceans by 2030” and G7 Finance Ministers endorsed the launch of the Taskforce for Nature-related Financial Disclosures. In the UK, following publication of the Dasgupta Review last year (see our blog), the Government recently set out its action plan on biodiversity and is exploring how to improve the way nature is incorporated into national accounts.

Regulating ESG rating providers to improve reliability and comparability

Improving the reliability and comparability across providers of ESG ratings will help drive improvements in the assessment of the ESG risks. Following ESMA’s January 2021 letter to the EC on bringing ESG ratings providers within the regulatory perimeter, the EC proposes strengthening the reliability and comparability of ESG ratings. It will publish a consultation on the functioning of the ESG ratings market in Q4 2021, potentially followed by a legislative initiative by Q1 2023. The EC may also assess whether a similar intervention is necessary in relation to ESG market research.

In the UK, in June 2021 the FCA consulted on whether there is a case for closer regulatory oversight of ESG data and rating providers.

Capturing ESG risks in credit ratings

The EC notes stakeholder concern around the degree of transparency on how credit rating agencies incorporate sustainability factors into their methodologies. In response, and subject to a review by ESMA, the EC will take action by Q1 2023 to ensure that relevant ESG risks are systematically captured in credit ratings and to improve transparency on the inclusion of ESG risks by credit rating agencies in credit ratings and outlooks.

Ensuring supervisors have power and capability to combat greenwashing 

The EC will strengthen rules to address greenwashing, moving beyond the actions taken to date which have centred on increasing transparency. Alongside the responsibilities of the ESAs, the EC will assess whether NCAs have sufficient supervisory powers, capabilities and obligations to address greenwashing, and whether enforcement measures taken by NCAs are sufficient. It will consider whether it is necessary to have either a stronger coordination and convergence role for the ESAs, or to amend EU legislation.

In the UK, the Chancellor pledged last week to combat greenwashing, and the FCA will develop principles later this year for the design, delivery and disclosure of ESG/sustainable fund products including to address greenwashing concerns.

Extension of the EU Taxonomy to support transition efforts

A significant part of the EC’s strategy relates to extending the scope of the Taxonomy. As set out in its April 2021 Communication, the EC will consider proposing legislation in Summer 2021 to support the financing of certain economics activities that contribute to reducing greenhouse gas emissions, such as agriculture, manufacturing and  the energy sector, including gas. The EC will also develop technical screening criteria for the remaining four environmental objectives under the Taxonomy Regulation: water, circular economy, pollution prevention and biodiversity.

In addition, to support transition efforts, the EU Taxonomy will be extended to better recognise the steps that need to be taken on the road towards a sustainable financial system (for example, differentiating between economic activities that cause different degrees of harm to the environment even where none of the activities meet the criteria for being “green”). Such an extension of the Taxonomy would enable firms and stakeholders to make a more nuanced assessment of the sustainability characteristics of transition plans.

As already required by the Taxonomy Regulation, the EC will publish a report on the extension of the scope of the Taxonomy Regulation by end-2021.

The EC will seek to leverage the opportunities digital technologies offer for sustainable finance. As part of this, the EC supports the development of low or zero emission data centres and distributed ledger technologies, including for crypto-assets, and will explore whether the EU Taxonomy should be expanded to include further supporting activities by 2023.

Extending sustainable finance standards and labels to support transition and channel finance

Product standards and labels help to channel finance to sustainable activities, as well as to reduce greenwashing risks. In addition to the proposal for a European Green Bond Regulation published  on 6 July, the EC will look at other bond labels, such as for transition or sustainability-linked bonds. By 2023 it will consider introducing a more general framework for labels for financial instruments to help bring transparency and credibility to sustainable finance markets. The EC will also consider creating an ESG Benchmark and, by end-2022, reviewing minimum standards for ESG-related Benchmarks. Finally, the EC will consider amendments to the Prospectus Regulation to create minimum requirements for the comparability, transparency and harmonisation of information available for all ESG securities

In addition, the EC plans to propose amendments to the Sustainable Finance Disclosure Regulation (SFDR), which took effect in March this year, setting out minimum sustainability requirements for financial products under Article 8 disclosures.


The EC states that it has put the foundations in place to transition to sustainability and a carbon neutral economy by 2050, integrating the objectives of the European Green Deal. It now calls upon the financial services sector to assist in the transition.  

The EC's renewed strategy sets out an extensive programme of actions that will further integrate and embed sustainable finance considerations across the financial services sector. The number and complexity of topics warrants early action from firms, and necessitates sustainable finance remaining at the forefront of senior management priorities. Firms should consider which parts of the EC’s forward agenda for sustainable finance will affect their strategy, operations, and resourcing needs, in particular in risk and compliance functions. Firms should also take the opportunity to get ahead of the medium- to long-term policy agenda – for example, assessing their exposure to future areas of focus such as biodiversity and natural capital-related risks, in anticipation of future regulatory and supervisory action.

Last week, alongside the Mansion House speech, the UK set out its ambition to be a “world-leader in green finance”. Overtime we expect the UK and EU to remain aligned along similar principles. However, there are some timing differences and certain requirements will be further developed in one jurisdiction before the other. Firms in the UK and EU should continue to look to both jurisdictions for indications of the direction of travel on different topics, whilst remaining aware that the details of requirements could diverge.