Factsheet
Background
The EU Sustainable Finance framework is expanding exponentially. However, as stated by Machiavel: “There is such a gap between how one lives and how one should live that he who neglects what is being done for what should be done will learn his destruction rather than his preservation .” . This factsheet intends to explore the practical consequences and possible adverse impacts of EU legislation for banks and their activities when it comes to sustainable finance. The following list of dossiers is not exhaustive.
Sustainable Finance dossiers
Energy Performance of Buildings Directive (EPBD)
• Making the transition towards zero-emission buildings (ZEB) involves many difficulties. Besides the enforcement challenges, national discrepancies exist in the number of Energy Performance Certificates (EPC) already available. Member states will have to invest in the enforcement of EPC requirements if they want to efficiently impose the new directive and set an adequate National Building Renovation Plan.
• It is likely that, in countries with few “green buildings”, the price of these buildings will increase significantly (which will eventually become a burden for households) because of the law of the supply and demand.
The renovation costs of inefficient buildings are estimated to vary between €15,000 and €100,000 (VEKA & national sources). The required investments depend on the country, state and type of building. Here, differences in building stock between Member States also poses a challenge.
• Overall, we can expect that countries with high renovation costs and a notable share of low-income homeownership, like Belgium, will face greater difficulties to trigger energy renovation. Research has already shown that in Belgium, 51% of households do not have sufficient savings to meet the energy renovation financing costs.
• Some costs are also expected for financial institutions, which will have to simultaneously address the transition to a more sustainable portfolio while making it climate change resilient.
• Reputational effect can be an indirect cost here.
• Some costs are also expected for financial institutions, which will have to simultaneously address the transition to a more sustainable portfolio while making it climate change resilient.
• Reputational effect can be an indirect cost here.
Carbon Border Adjustment Mechanism (CBAM)
• The rapid phase out of free allocations of ETS allowances would mean that starting from 1 January 2024, the carbon cost for manufacturers subject to EU ETS who are also offered a protection under CBAM could increase the price of manufacturing much faster than expected given the need to acquire additional ETS allowances.
• Some of the immediate, direct impacts that EU companies may feel include potential higher import prices of covered goods (e.g., steel) and increased prices of secondary goods that include components of covered goods (e.g., vehicle manufacturers buying parts from another EU manufacturer that contain imported higher-priced steel/ aluminium).
• Additionally, supply chain disruptions may occur if imported goods are stopped at the border due to imported covered goods not being declared to customs by an authorized declarant or incorrect classification of goods according to the CN codes.
•
• See note attached for additional figures: https://www.cae-eco.fr/staticfiles/pdf/cae-focus059.pdf
Corporate Sustainability Reporting Directive (CSRD)
•
• The suggestion emphasises that corporations are already facing an increasing financial burden as a result of stakeholders’ demand for sustainability information.
• Administrative costs: As a direct impact of the CSRD, the disclosure requirements will likely impose a burden on these undertakings. The additional costs incurred can vary depending on the extent to which undertakings were already subject to the NFRD prior to the CSRD, and on their voluntary reporting. For example, large undertakings preparing non-financial reporting, otherwise known as preparers, already collect and report some sustainability information. By contrast, non-listed preparers that do not fall under the scope of the NFRD (non-NFRD) are much less likely to collect sustainability data, given that the cost of reporting voluntarily is significant.
• Overall, non-NFRD non-listed undertakings are set to experience the largest collective direct costs as a result of the ESRS. For these preparers, the total one-off cost is estimated to be around EUR 1.6 billion and recurring costs at EUR 1.8 billion. Such large costs for non-listed non-NFRD undertakings can be explained by their dominant share (95%) of undertakings in the population of preparers. The total administrative costs for all undertakings combined are estimated at EUR 2.1 billion in one-off costs and EUR 2.4 billion in recurring costs .
• The assurance costs are expected to increase significantly due to more comprehensive coverage. Initially, limited assurance will be required, transitioning into reasonable assurance after a six-year period from the entry into force of the CSRD. Due to the phase-in of the disclosure requirements, assurance costs will vary per year. In the first years the costs will be low compared to the following years, as not all disclosure requirements have to be implemented. In particular, in the financial year
2026, assurance costs will increase significantly because of the implementation of certain disclosure requirements.
•
• To go further: https://cdn.ceps.eu/wp-content/uploads/2022/11/Cost-benefit-analysis-of-the-First-Set-of-draft-European-Sustainability-Reporting-Standards.pdf
Corporate Sustainability Due Diligence Directive (CSDDD)
• The text still needs to be agreed on, but one can already think about some costs.
• High litigation costs with reputational effects if civil liability provisions are kept in the text (which should be the case).
• Competitiveness issue for EU companies compared to non-EU ones (since the thresholds and requirements are different). Moreover, EU companies might be forced to withdraw from some markets (notably in Asia or Africa) because of this directive.
•
Deforestation regulation
• Financial institutions are not in the scope but they will likely be included with the review clause which should take place no later than June 2024.
• In any event, one can foresee that this regulation will result in an increase of costs for the listed goods in European countries (due to the disruption between the demand and the supply). This will notably affect a basic product such as coffee
