Greening the financial sector Summary

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Underinvestment, particularly in climate change, is a significant impediment in Central, Eastern and South Eastern Europe. This summary covers climate change risks to the financial sector, regulatory and supervisory issues, decarbonisation pathways in different sectors and banks’ transition plans.

Image courtesy of interviewee. June 29, 2024

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The Vienna Initiative focuses on ensuring financial stability in Central, Eastern, and Southeastern Europe by facilitating discussions among banking representatives, regulators, and institutions. Its relevance has grown during events like the COVID-19 pandemic and the war in Ukraine, addressing critical issues such as green transition, regulatory practices, and data gaps in the banking sector. A working group was established in 2021 to develop a report on greening the financial sector, emphasizing the need for banks to identify transition paths and stranded assets.

New sustainability reporting standards are set to aid smaller companies starting next year, with increased obligations for smaller banks in three years under corporate sustainability directives. While there are challenges related to data management, progress has been noted, with rapid developments in climate stress tests and enhanced scrutiny from stakeholders regarding banks' climate risk evaluations.

Multilateral development banks are prioritizing green initiatives, yet confusion persists between local and EU regulations. The energy sector is key to the green transition, aiming for a 55% reduction in emissions by 2030 and climate neutrality by 2050. While renewable energy is replacing traditional sources in Central Eastern Europe, challenges like price volatility and the need for substantial investment in energy efficiency and infrastructure remain. The aging building stock further necessitates increased investment to improve energy efficiency.

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X-TIMESTAMP-MAP:LOCAL=00:00:00.000,MPEGTS=900000

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The Vienna Initiative aims

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to safeguard financial stability in central, Eastern,

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and southeastern countries by facilitating discussion

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among banking sector representatives,

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regulators, and institutions.

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The initiative has become increasingly relevant,

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particularly during the COVID-19 pandemic

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and the war in Ukraine, as it addresses topics such

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as green transition, data gaps, prudential regulation

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and transition plans for the banking sector.

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A working group on climate change

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and financial stability was established in 2021.

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To address these issues with experts from both public

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and private sectors contributing to the development

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of a report on greening the financial sector.

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Banks need to map transition paths

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and identify stranded assets for better risk management

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and ESG disclosure.

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They gather information from primary

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and secondary sources with primary coming from direct

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dialogue with companies

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and secondary from studies, research, surveys,

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samples, and models.

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A new sustainability reporting standard is expected

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to benefit smaller companies next year.

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In three years, smaller banks will be legally obliged

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to provide information under the corporate sustainability

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reporting directive with their information audited.

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There will also be voluntary reporting standards

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for non-listed SMEs and micro companies.

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The number of companies under the reporting standards is

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expected to be four times higher.

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Challenges regarding data such as measurement

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and storage remain,

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but progress has been made

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with Prudential authorities playing a crucial role in the

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green transition and financial stability.

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Rapid evolution of climate stress tests

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and transition plans has occurred in recent years

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with growing involvement of ESG

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or climate departments in decision making processes.

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Internal and external stakeholders are increasingly

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scrutinizing banks', climate risk evaluations,

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and green lending policies.

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Multilateral development banks, such

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as the European Investment Bank,

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are prioritizing green initiatives within their mandates.

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Challenges include confusion between EU global

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and national regulations

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and managing different environments

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for banks operating in various regions.

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Banks need support for the green transition

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and are requesting guidance on measures and expectations.

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The energy sector plays a crucial role in this transition

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with the goal of minor 55% emissions by 2030

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and climate neutrality by 2050.

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Energy companies are major clients for banks who will need

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to finance investments in low carbon generation renewables,

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and grid infrastructure for a sustainable future,

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while ensuring energy security.

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Renewable energy is replacing traditional energy sources in

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Central Eastern Europe leading to price volatility.

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High renewable energy production

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Can cause prices to drop drastically within a day,

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presenting challenges for investment

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and revenue forecasting.

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The energy sector's importance is evident as 40%

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of energy consumption comes from buildings,

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and 36% of emissions are produced

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with an aging building stock

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and low renovation rates increased investment is needed

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to improve energy efficiency.

00:00 - The Vienna Initiative aims to safeguard financial stability in central, Eastern, and southeastern countries by facilitating discussion among banking sector representatives, regulators, and institutions. The initiative has become increasingly relevant,

00:15 - particularly during the COVID-19 pandemic and the war in Ukraine, as it addresses topics such as green transition, data gaps, prudential regulation and transition plans for the banking sector. A working group on climate change and financial stability was established in 2021. To address these issues with experts from both public and private sectors contributing to the development of a report on greening the financial sector. Banks need to map transition paths

00:46 - and identify stranded assets for better risk management and ESG disclosure. They gather information from primary and secondary sources with primary coming from direct dialogue with companies and secondary from studies, research, surveys, samples, and models. A new sustainability reporting standard is expected to benefit smaller companies next year. In three years, smaller banks will be legally obliged

01:11 - to provide information under the corporate sustainability reporting directive with their information audited. There will also be voluntary reporting standards for non-listed SMEs and micro companies. The number of companies under the reporting standards is expected to be four times higher. Challenges regarding data such as measurement and storage remain, but progress has been made with Prudential authorities playing a crucial role in the

01:40 - green transition and financial stability. Rapid evolution of climate stress tests and transition plans has occurred in recent years with growing involvement of ESG or climate departments in decision making processes. Internal and external stakeholders are increasingly scrutinizing banks', climate risk evaluations, and green lending policies. Multilateral development banks, such as the European Investment Bank,

02:06 - are prioritizing green initiatives within their mandates. Challenges include confusion between EU global and national regulations and managing different environments for banks operating in various regions. Banks need support for the green transition and are requesting guidance on measures and expectations. The energy sector plays a crucial role in this transition with the goal of minor 55% emissions by 2030 and climate neutrality by 2050.

02:37 - Energy companies are major clients for banks who will need to finance investments in low carbon generation renewables, and grid infrastructure for a sustainable future, while ensuring energy security. Renewable energy is replacing traditional energy sources in Central Eastern Europe leading to price volatility. High renewable energy production Can cause prices to drop drastically within a day, presenting challenges for investment and revenue forecasting.

03:06 - The energy sector's importance is evident as 40% of energy consumption comes from buildings, and 36% of emissions are produced with an aging building stock and low renovation rates increased investment is needed to improve energy efficiency.

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