By Ciara Davies

On 21 November 2020, the ECB published the transcript of an interview given by its Executive Board Member and Supervisory Board Vice-Chair, Yves Mersch, on green and sustainable finance.

The following points were covered in the speech:

Green finance could degenerate into a pure marketing tool. Investors need to be able to assess how their investments contribute to more sustainability. Informational market failures can arise if information on the sustainability of businesses and financial products is inconsistent, largely not comparable and at times unreliable or even completely unavailable. Definitions of sustainable investment are often subjective and inconsistent.

The Taxonomy Regulation (Regulation (EU) 2019/2088) is important. However, the taxonomy was designed with green bonds in mind and so its application to other financial products might not be straightforward and the overall design might need to be adjusted. There are plans to create more widely applicable industry standards.

The taxonomy is useful for green investment decisions, however, it is not helpful in the risk assessment of economic activities exposed to climate risk.

Financial institutions need to ensure that they can identify and deal with the risks emerging from climate change and a rapid transition to a carbon-neutral economy. Otherwise, there remains a risk of "greenwashing" and of an unsustainable "green bubble" detached from fundamental data.

The ECB is to publish a guide on climate-related and environmental risks, which will set out how, in its view, institutions should take climate and environmental risks into consideration. The ECB will also publish a report on banks' disclosure of environmental risks. Having reviewed the banks’ disclosures for the previous year, more than half of them did not meet the minimum requirements in the guide.