How sustainability reporting of banks aligns with the Paris Agreement – a critical analysis of the financial sector’s reporting regulations in the European Union

Abstract

The purpose of this paper is to critically evaluate if the sustainability reporting requirements for banks in the European Union (EU) suffice to fulfill Article 2.1c of the Paris Agreement, which requires financial flows to be “consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” (United Nations 2015) as well as to identify areas of improvement. To this end, this paper examines the EU Taxonomy, the Corporate Sustainability Reporting Directive (CSRD), and the Sustainable Finance Disclosure Regulation (SFDR) in terms of their alignment with Article 2.1c along eight criteria: scope of companies, scope of emissions, transparency, comparability, materiality, steering capability, external assurance, and sanctions. Current regulations are insufficient to achieve climate-neutrality due to four reasons. First and foremost, none of the existing regulations include specific targets against which companies are measured. Second, there is no obligation for comprehensive external assurance. Third, there are no sanction mechanisms for companies that do not conform to the Paris Agreement. And finally, the regulations are not extensive enough in considering the banks’ loan books. The currently evident lack of scientific research does not do justice to the explosive nature of the issue. The authors hence propose multidisciplinary research to derive appropriate and sector-specific interim targets that support and guide the path to climate neutrality. Only if the legislator ensures that interim targets are set for companies against which they are measured, information is externally assured, and sanctions are imposed for non-compliant companies, will the achievement of the Paris Agreement become realistic. Furthermore, stricter regulation is needed that considers all business areas of financial institutions, especially banks’ loan portfolios. This paper is the first to assess the existing EU regulatory framework for sustainability reporting in terms of their sufficiency in achieving Article 2.1c of the Paris Agreement.