Green finance: Transparency in the financial sector

This year, the SIG Corporate Governance & Compliance has inter alia a focus on corporate transparency. A relatively new aspect of corporate transparency is its importance in obtaining financing from banks or investment funds.

The financial sector is repeatedly cited as an important guide in steering the economy and society towards sustainability. Investments that harmonise with climate targets clearly play an important role in effective environmental and climate protection. 

The Paris Agreement on Climate Change made it clear in 2015 that private and public financial flows must be combined with low-emission and resilient development in order to achieve global climate targets. Transparent disclosure of fundamental information on climate action is a key aspect in this regard. The positive effects of transparency should result in a flow of capital to ecological projects, and also helps companies under scrutiny avoid greenwashing.

Setting (non)binding minimum standards for sustainable financial products is of great importance to both the EU and national legislators. To promote transparency in the financial sector regarding climate and environmental impacts, the EU Disclosure Regulation ((EU) 2019/2088) obliges financial market participants and financial advisors to deal transparently with any sustainability risks. Information must be provided on their various financial products. With regard to investment decisions and advice, companies are required to disclose whether investment in certain enterprises may have a negative climate impact, and the impact must be presented based on environmental, social, and governance (ESG) factors. 

The ESG Data Hub of the Austrian Control Bank (OeKB) offers companies the opportunity to evaluate their own ESG criteria and share them directly with financial institutions and banks via the database. Financial market participants can use this information directly when advising on investment matters. Another information resource – the ESG data of borrowing companies can be used by banks when deciding whether to grant a loan. According to a press release issued by OeKB in August 2023, around 60% of the Austrian banking sector uses the platform to record sustainability data. 

A similar web portal is to be created at the EU level with the establishment of the European Single Access Point (ESAP). The legal basis for this initiative – the ESAP Regulation ((EU) 2023/2859) – was adopted in December 2023. The European Securities and Markets Authority plans to set up the platform by July 2027. 

In the US, the Security and Exchange commission reports: “Investors have been seeking more information related to climate risks that affect the public companies they own.” Many companies are presenting their climate-related activities and risks outside of public filings. “The Commission has proposed rule changes that would require companies to include certain climate-related disclosures in their registration statements and periodic reports.”

Meanwhile, small to medium-sized businesses are dealing with the culture shock of the Corporate Transparency Act in the US and Canada. Predictably, the unintended consequences of these Acts will be the domino effect of state and province ‘look alike’ acts.

Therefore advisors should recommend that their clients provide transparent corporate information about their sustainability efforts and risks to allow them easier access to financing.