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    ESAs Seek Clarifications on Interpretation of SFDR

    September 16, 2022

    The Governing Council of the European Central Bank (ECB), in a recent letter, reiterated its commitment to incorporate climate change considerations in the Eurosystem policy framework. Additionally, the European Supervisory Authorities (ESAs) submitted queries, to the European Commission (EC), on the interpretation of the European Union laws on the Sustainable Finance Disclosure Regulation (SFDR).

    Letter on climate change considerations. The ECB letter discusses a broad range of possible instruments that could be used, within its mandate, to incorporate climate change considerations into the monetary policy framework such as setting up a green targeted lending facility and the quantitative targets and timelines for measures announced with respect to the corporate bond holdings and collateral framework. The measures include:

    • Setting of Green targeted lending facility. ECB states that the feasibility of refinancing operations with a green target crucially hinges on the availability of a proper definition of these criteria and the ability to measure them reliably. While ongoing regulatory developments can be expected to improve data availability over time, significant challenges persist in relation to data coverage and quality as well as verification processes and capacities.
    • Corporate bond holdings. ECB will tilt corporate bond holdings toward issuers with better climate performance, through the reinvestment of the sizable redemptions expected over the coming years. When tilting, Eurosystem will consider not only companies’ current carbon footprint but also their decarbonization targets as well as the quality of their climate disclosures. ECB expects these measures to apply from October 2022 and will start publishing climate-related information on corporate bond holdings regularly as of the first quarter of 2023.
    • Collateral Framework. ECB will limit the share of assets issued by entities with a high carbon footprint that can be mobilized as collateral by individual counterparties when borrowing from Eurosystem. The new limits regime aims to reduce climate-related financial risks in the Eurosystem credit operations. ECB expects these measures to apply before the end of 2024.

    Queries on interpretation of SFDR. The queries from ESAs relate to the definition of “sustainable investment,” interpretation of an “investment in an economic activity that contributes to an environmental objective” or “investment in an economic activity that contributes to a social objective,” carbon emission reductions and other benchmark questions under Article 9(3) SFDR, principal adverse impact considerations, and periodic disclosure frequency for portfolio management services.


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    Keywords: Europe, EU, Banking, Securities, ESG, Climate Change Risk, Decarbonization, Corporate Bonds, Collateral Framework, Lending, Credit Risk, Green Finance, SFDR, Sustainable Finance, Q A, ECB, EC, ESAs

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