New European Union regulation on sustainability could have a disproportionate impact for emerging Europe, banking and housing, experts have warned.
Speaking at Euromoney’s virtual CEE Forum on January 13, Jennifer Johnson of the European Mortgage Federation highlighted the risks posed to the region by the EU’s taxonomy for sustainable activities.
From January 2022, the taxonomy will define which businesses and transactions within the bloc can count as sustainable for the purposes of financing. Initially, it will only cover climate change, although four more environmental objectives – water, circular economy, pollution control and biodiversity – are due to be added by 2023.
Markets with less well-performing building stock… will potentially suffer
Jennifer Johnson, European Mortgage Federation
The taxonomy has already proved controversial.
Critics argue that the criteria, which require an activity to “contribute significantly to climate change adaptation or mitigation”, are too restrictive.
A one-month consultation on the regulation that closed on December 18 attracted more than 46,500 responses.
With regard to housing, Johnson – who is also deputy head of the European Covered Bond Council – described the European Commission’s approach in the taxonomy as “very ambitious”.
“They consider only the very best-performing buildings to be taxonomy compliant,” she said. “Given that 95% of the buildings in the EU don’t come in that category, that means the eligible assets for energy-efficient mortgages, or covered bond or bond funding, would be greatly reduced.
“That in turn would compromise the ability of banks to finance the energy transition.”
The situation is exacerbated in central and eastern Europe (CEE), where the legacy of the communist era and the difficult years of transition that followed it are still evident in the relatively low quality of the housing stock.
“Markets with less well-performing building stock or where renovation rates have been low will potentially suffer more from a wrongly calibrated taxonomy,” Johnson said.
The first connotation I have when I hear [taxonomy] is bureaucracy
Ingo Bleier, Erste Group
Ingo Bleier, head of corporate banking at regional banking leader Erste Group, was equally critical of the taxonomy a the forum.
“The first connotation I have when I hear that word is bureaucracy,” he said.
He highlighted the challenges for banks in emerging Europe of reconciling the needs of the local markets with demands from Brussels.
“Within CEE there is still a high dependency on old energy sources and there’s also in many parts outdated infrastructure,” he said. “It’s very important that we promote financing for an energy transition, but we need to do that also with respect to local social elements.
“As a bank we are being pulled in one direction by CEE necessities and in another by a regulatory view in Brussels that is maybe not yet coordinated with all the local authorities.”
On a positive note, Bleier pointed to a recent surge in interest in sustainable investing within CEE, citing as an example the rapid growth last year of an environmental fund managed by Erste.
Again, however, he warned regulation could put a dampener on this emerging trend.
“We see that the private sector interest is there, and we want to utilize it,” he said. “But to do so we need consistency of regulation. What we don’t need is too much bureaucracy within that process.”
