Green Transition

The green and sustainability agenda of the Bank

Sustainable development and environmentally sound investment are intrinsic to the EBRD’s mandate and incorporated in its founding agreement of 1991. This commitment is restated in EBRD sector and country strategies and integrated in all projects that the Bank finances through the environmental and social requirements set out in our Environmental and Social Policy. Most importantly, it is embedded in our transition mandate. The Bank’s mandate is to “foster the transition towards open market-oriented economies”. Addressing climate change, famously described by a former Chief Economist of the Bank, Lord Nicholas Stern, as “the greatest market failure the world has seen”, is fundamental to this agenda.

Emerging economies and developing countries are particularly vulnerable to climate change. We saw the devastating impacts of wildfires in Turkey, Greece and Bulgaria last summer, as well as flooding in Central Europe and droughts in Central Asia and North Africa. The costs of these events can be measured in lost lives and livelihoods, lost homes, lost businesses and billions of euros in emergency services and disaster relief. At the same time, the countries in the EBRD regions are among the most energy-intensive economies in the world and often lack capacity, technical knowledge, policy and legal frameworks to support the transition to net zero.

Addressing climate change is at the core of the Bank’s Strategic and Capital Framework for 2021-2025. “Supporting the transition to a green, low carbon economy” is one of its three strategic themes, alongside inclusion and digital. This orientation builds on a long tradition in the Bank that began with the adoption of the Sustainable Energy Initiative in 2006. The EBRD’s efforts in this area have two pillars:

  • A target of ensuring that green finance represents at least 50 per cent of the Bank’s annual investments by 2025.
  • A commitment, adopted formally by the Bank’s shareholders in summer 2021, to align all EBRD operations with the goals of the Paris Agreement by 1 January 2023.

The Bank, in fact, reached the first target four years early, with green finance representing 51 per cent of commitments in 2021. This reflects the comprehensive mainstreaming of green thinking throughout the business cycle. However, the commitment to Paris alignment represents an even more fundamental reshaping of the Bank’s operations to align every aspect with the long-term goal of fostering a low-carbon transition. This, of course, begins with a close assessment of every Bank investment. To this end the EBRD has developed and published detailed methodologies to underpin this assessment. But it extends to cover the Bank’s own operations and its funding approach. Perhaps most importantly, Paris alignment includes broad-ranging support for the Bank’s regions and clients in designing their own pathways to a net-zero endpoint.

The EBRD’s green financing approach is anchored to its client‐driven and private-sector business model and in line with its operating principles of transition impact, sound banking and additionality. Addressing market failures in this area, rooted most fundamentally in the lack of pricing greenhouse gas externalities, our policy work will have an important role alongside the Bank’s financing activity.

Supporting the green agenda through investment and policy dialogue: Implications of COP26 for the EBRD

COP26 catalysed a significant increase in climate ambition across governments and businesses. Beyond the commitments made before and during COP26, the Glasgow Climate Pact codified the conclusions of the meeting, including a crucial commitment from countries to update the nationally determined contributions (NDCs) and prepare long-term strategies in 2022. These documents form the vital architecture of a low-carbon transition, setting the direction and speed of travel. They must be clear, detailed and credible enough that investors can respond, and they have to capture the level of ambition needed to meet the Paris Agreement temperature goals. Collectively, however, the updated NDCs and the new pledges leave a 15 per cent to 20 per cent gap between the current emissions trajectory and the trajectory required to meet the Paris goal of limiting the global temperature increase to 1.5°C.

Responding to this, the EBRD has sharpened its focus on policy instruments supporting the climate transition, including by enhancing cooperation on countries’ updated NDCs, helping develop long-term strategies and other low-carbon and climate-resilient pathways at sector and subnational levels. For example, the Bank is supporting the development of a low-carbon pathway for the power sector in Uzbekistan, a low-carbon pathway for the steel sector in Turkey and the development of a green hydrogen strategy in Egypt. This work is not obviously connected to the investments and loans that are the “bread and butter” of a development bank’s work, but in fact they are inextricably linked. The policy dialogue creates the enabling environment for green investments; the understanding of investor needs informs the policy dialogue.

This work to help countries recalibrate their economies to incentivise low-carbon investments is vital because it addresses the critical constraint holding back those investments. There is sufficient capital and financing available for the net-zero transition, especially for clean energy and carbon-reducing projects. One of the highlights of COP26 was the announcement by the Global Financial Alliance for Net Zero (GFANZ) of more than US$ 130 trillion of capital committed to adopting high-ambition, science-based targets, including achieving net-zero emissions by 2050.4 A growing number of low-carbon technologies have reached the level of maturity where they are capable of being rapidly scaled, making them increasingly cost-competitive. However, there are insufficient commercially robust projects coming to market at the speed needed for those funds to be used and, importantly, at the speed required to reduce emissions. This challenge motivates the broad range of policy engagement that the EBRD carries out in this area.

Addressing climate change is at the core of the Bank’s Strategic and Capital Framework for 2021-2025.

In addition to the United Nations Framework Convention on Climate Change (UNFCCC) negotiations and the outcomes captured in the Glasgow Climate Pact, COP26 also prompted the adoption of various initiatives that won wide support, but not the consensus required of a formal UNFCCC conclusion. These spanned a very wide range of issues, from protecting Congo Basin forests to phasing out internal combustion engine vehicles. One of the major commitments by the parties was a move away from coal and a redirection of funds to cleaner energy, also reflected in the carefully crafted wording in the Glasgow Climate Pact, committing to a “phase down” of coal consumption. This aligns well with the EBRD’s longstanding work to accelerate the development of alternative energy solutions in its regions by supporting energy sector reform, investing in new technologies and mobilising private-sector capital. Decarbonisation and integration of energy systems are at the heart of the EBRD’s 2019-2023 energy strategy. Back in 2018 the Bank decisively shifted away from the most polluting fuels by closing the door on thermal coal mining or coal-fired electricity generation. In 2021 the Bank also concluded that it would not invest in upstream oil and gas exploration or production. Instead, the EBRD aims to scale up investment in renewables and finance smart, integrated and resilient networks and regionally integrated markets. It is also increasingly focused on the newer technologies that will be fundamental to deep energy decarbonisation, in particular energy storage, e-mobility and green hydrogen.

The energy transition is not only about investment in zero-carbon infrastructure; the world relies on hydrocarbons for 80 per cent of its energy needs. That is reflected in the existing infrastructure, and a critical challenge in the coming years is to engage with that infrastructure, to reduce its emissions and to transform it to a low-carbon mode. The EBRD accordingly remains engaged with the high-emitting sectors. It was the first multilateral development bank (MDB) at COP26 to sign the Global Methane Pledge, a commitment now made by more than 100 countries to reduce their collective methane emissions by 30 per cent by 2030.5 Methane abatement is a key focus area for the coming years because it is typically low cost and can generate revenue by avoiding losses. Furthermore, methane emissions are high impact, with a global warming potential 27 to 80 times that of carbon dioxide, depending on the timeframe assessed.

COP26 also placed considerable scrutiny on climate finance as one of the main pillars of the international climate change regime. A central plank in that regime is the commitment made in the 2009 Copenhagen Accord to mobilise US$ 100 billion of climate finance by 2020 for developing nations. The Glasgow Climate Pact acknowledged “with deep regret” that developed countries had not met that goal and would be unlikely to do so before 2023. It reaffirmed the commitment of developed countries to this goal, however.

MDBs play an important role in delivering this goal, but clearly their own resources are insufficient. While MDBs’ climate finance from their own resources exceeded US$ 63 billion in 2020,6 little of that finance is provided in developing countries. Accordingly, to reach the investment needs required and to contribute to the US$ 100 billion goal, all MDBs strongly emphasise mobilising other sources of climate finance. These efforts focus especially on the private sector, which has, as the GFANZ declaration highlighted, huge volumes of capital available for this agenda, at least in principle. Beyond just the money, the private sector also brings innovation, diversity and operational resources; the dramatic fall in renewable costs over the last decade demonstrates vividly how effective those characteristics can be.

The EBRD aims to scale up investment in renewables and finance smart, integrated and resilient networks and regionally integrated markets.

This mobilisation is a priority for the EBRD, given its primarily private sector-oriented mandate. In 2020 the Bank mobilised US$ 1.80 of private climate co-financing for every dollar of its own climate finance committed, compared to US$ 0.50 among MDBs as a whole.7 Consistent with that priority, the EBRD also announced at COP26 a goal of doubling its private-sector climate mobilisation by 2025.

The importance of the private sector and the business community in transition towards a low-carbon, climate-resilient economy was highlighted repeatedly at COP26, making it by all accounts the conference of the parties with the strongest business participation ever. There is now broad recognition that climate change is a systemic source of both risks and opportunities for businesses, and that companies must strengthen their corporate climate governance to adjust to this shifting market context. Yet most companies in emerging markets have little visibility on what their climate risk exposure might be. We see this in the gulf between levels of governance and disclosure of climate-related risks and opportunities in developed and emerging markets.8

The EBRD has accordingly extended support to its clients to develop and enhance their corporate climate governance consistent with the recommendations of the Task Force for Climate-related Financial Disclosures. As a mainly private-sector bank, our strength is to engage with businesses and help them adopt better corporate practices by assessing, managing and disclosing information about climate-related risks and opportunities. As companies integrate these actions into their risk management and business strategies, they become part of the market shift towards low-carbon and resilient economies.

The final piece of the framework refocusing private capital on the climate challenge relates to standards. Institutional investors are increasingly looking to finance green and sustainable products.9 Climate-related reporting of large financial institutions and companies is gradually being mandated in law and regulations at a national level,10 with some jurisdictions requiring the integration of climate and ESG reporting and financial reporting.11 Therefore, there is growing demand for a more quantifiable and comparable measure of emissions and environmental impact, especially for greater simplicity and credibility in the fast-growing plethora of green standards, initiatives, institutions and principles. The new standard-setting institution established by the International Financial Reporting Standards Foundation and announced at COP26 – the International Sustainability Standards Board – will contribute to the long-awaited harmonisation of standards with direct impact on companies and investors.

The EBRD also announced at COP26 a goal of doubling its private-sector climate mobilisation by 2025.

The role of law in delivering on the climate agenda

Tackling climate change is in many ways a matter of justice. The impacts of climate change are pervasive and raise many scientific, political, economic and financial questions as well as questions about equity and responsibility; and, of course, each of these areas has a direct nexus with the law. Climate change threatens the effective enjoyment of a range of human rights, including those to life, water and sanitation, food, health, housing, self-determination, culture and development. As one of the largest investors in the EBRD regions, the Bank has committed to ensure that no one is left behind while we transition away from fossil fuels into a more sustainable and cleaner world. Such a “just transition” is one where the benefits of a green economy are shared, while support is also provided to those that stand to lose economically from the transition – be they countries, regions, industries, communities, workers or consumers. To unlock opportunities for climate finance and to ensure a “just transition”, we need enabling, sound and transparent legal frameworks and policy development.

Law is fundamental for tackling climate change effectively. Legal acts underpin policy commitments and targets, turning them into binding obligations and setting out the institutional framework to support the policy objectives. Climate laws also produce an enabling environment for private-sector investments, creating legal certainty and business opportunities. A national climate framework law, for example, mandates a country to cut its carbon emissions to net zero by a certain date (ideally no later than 2050) and ensures oversight and accountability. A strong and enforceable climate law also has interim targets to ensure this mark is reached and obliges the government to develop a roadmap to achieve the targets.

To drive action on the crisis, laws need to change at many levels, and they must be clear, participatory and inclusive. We need to strengthen and update laws relevant to all sectors (for instance, energy, land use and planning, transport) to take account of urgent climate objectives and obligations. Sectorial laws, in particular, set clear targets for specific industries, create a level playing field for investors and regulate new relationships in areas pushed forward by the pace of the energy and climate transition (for example, offshore wind laws). At the EBRD, we support national authorities and policymakers as they develop and implement innovative legal instruments and institutional capacities to attract and absorb financial flows while ensuring an equitable sharing of the benefits for the community.

For example, we have supported national authorities in Eastern Europe, the Caucasus, Central Asia and North Africa to introduce modern legal and regulatory practices in the energy sector. This includes reviewing and updating energy sector legislation, strengthening the institutional capacity of regulators, building market interconnections and opening up transparent and competitive markets for renewable energy. The new national legal and regulatory frameworks that the EBRD has supported have been instrumental to unlocking opportunities for major private-sector solar developments in North Africa, the Western Balkans and Central Asia, among other regions.

Finally, but importantly, countries need to invest in environmental rule of law to reduce and prevent pollution, establish dispute resolution mechanisms in case of violation and ensure the enforcement of sanctions. Many countries also recognise the mutually reinforcing relationship between human rights law and the environment,12 which provides a more robust and enforceable legal protection regime for disadvantaged communities. And as this last point implies, the judiciary has an essential role in tackling climate change; the tidal wave of climate-related litigation is swelling.13 The Bank has a long-standing tradition of supporting lawyers, the legal profession and the judiciary in the economies where we invest, so it is only natural for the EBRD to help lawyers navigate the increased complexities caused by the impacts of climate change.

How lawyers can pave the way to net zero

It is tempting to feel helpless in the face of the immensity of the climate change challenge, but as lawyers, we have both the capacity – some even argue a duty – to act and contribute.

At the EBRD, our in-house lawyers ensure that sustainability is embedded within our strategic documents and integrated into our broader business operations and our policy dialogue. Our legal support ranges from advising on financing agreements with donors and climate funds to project structuring, institutional support and policy and regulatory advice. We prepare the legal structures and agreements supporting mitigation and adaptation investments and advise when the Bank subscribes to green bonds or sustainability-linked bonds issued by clients in the region.14

In addition, we advise our Treasury department on the issuance of new products aimed at supporting the low-carbon and resilient agenda of the Bank, such as the EBRD’s Green Bonds,15 which are aligned with the International Capital Market Association’s Green Bond Principles. The Bank has issued sustainability bonds and the world’s first dedicated climate resilience bond16 as part of efforts to green our portfolio.

Lawyers also provide critical input to the Bank’s policy framework on sustainability, which includes three key policies that ensure the EBRD meets the highest standards: the Environmental and Social Policy, the Access to Information Policy and the Project Accountability Policy. In addition, EBRD lawyers provide support and guidance to economies where we operate in implementing policy, law and governance reforms to build climate resilience and reduce carbon emissions.

The legal profession more broadly will play a leading role in maintaining and strengthening the rule of law and supporting transparency and responsible governance for delivering on the sustainability goals. As companies seek to attract new capital by publishing their ESG or climate reports, in particular, separating the wheat from the chaff can be complex. Understandable concerns about greenwashing17 are growing and scrutiny of companies’ green claims on a whole range of products is intensifying. And as climate liability is on the rise, lawyers must consider climate-related risks in advising their clients.18 Finally, in company law, the changing nature of directors’ duties pressures executives and their legal advisers to consider the impact of a firm’s business on the community and the environment, in addition to the material climate and ESG risks the company faces.

As we engage with our clients, we have seen the expanding role of in-house lawyers as drivers of change in organisations by advising on innovative project structures and demanding climate-conscious provisions in legal agreements and standard contracts (for suppliers or service providers, for example). The general counsel in particular should be a trusted adviser to the board on matters related to good governance, reputation and integrity in the context of ESG and climate-related reporting. As climate and sustainability regulation become more stringent, lawyers will expect to play a more important role in aligning the sustainability strategy with the regulatory environment, highlighting potential current and future risks. Aligning and balancing business and sustainability strategies must become part of the in-house lawyers’ repertoire to manage and enhance the ESG portfolio.

Law is fundamental for tackling climate change effectively.


Responding to the climate crisis is one of, if not the, greatest geopolitical challenges of the coming decades. We already observe the impacts across all countries of a 1°C temperature increase. We have emitted enough greenhouse gases that a further increase, and thus further impact, is inevitable. A failure to hold that increase to the goals set out in the Paris Agreement risks impacts of ever-worsening scale and nature.

We know what needs to be done to reach the Paris Agreement goals, to avoid those impacts, to preserve the benefits of modern developed economies and to spread those benefits globally: a global economy that relies overwhelmingly on hydrocarbons must be rebuilt with infrastructure and systems that run on clean energy. More than ever before, we know not just what has to be done, but how it can be done. The pathways to reduce emissions to zero by 2050 are uncertain, but the pathway to halve emissions by 2030 is clear, feasible and affordable: reduce energy intensity, electrify road transport, progressively electrify heating and industry, shift electricity generation to wind, solar and other renewables, conveyed on a smart network with growing quantities of storage, and start the process of decarbonising aviation, shipping and heavy industry.

The climate crisis is at heart a human crisis. The impacts of climate change are not book entries, but lost opportunities, displaced communities, degraded biomes, drought, hunger, poverty and all the ills that flow from these. Addressing such a complex, pervasive challenge requires a set of rules and a belief in the value and credibility of a rules-based system. Lawyers believe in the rule of law as an essential prerequisite for a just and fair society delivering better outcomes for all. That same aspiration sits at the core of a development bank’s mandate. In addressing a challenge that is multifaceted, global and multigenerational, lawyers from all paths of the profession have an essential role to play.

Sustainability frameworks are intrinsically linked to the concept of sustainable development.26 To translate sustainability into practical solutions on the business level, we have mainstreamed it through ESG criteria. At the same time, ESG information on a company can prove abstract unless there is a robust policy framework, meaningful targets and a direction of travel. ESG reporting should rely on consistent, comparable and systematic standards and show progress towards clear corporate commitments. To ensure impact beyond individual companies, we need to draw on concepts such as science-based targets, nature-based solutions and net-zero pathways and secure broader engagement. The mobilisation of actors and solutions will provide the much-needed data, tools, independent verification, pressure and sanctions.

Towards greater HARMONISATION and regulation

The 2018 International Panel on Climate Change (IPCC) report warned that the carbon budget on our planet is running out. We are living in a critical decade when we can witness the devastation to communities and economies that climate change brings, while we still have limited time to avert the worst possible impacts. The February 2022 IPCC report has laid bare the urgent need to reduce global emissions and invest in adaptation measures to the physical impacts of a warming planet. Climate change, pollution and unsustainable business practices are taking a toll on the natural capital, contributing to a biodiversity loss that further accelerates climate change.

Since the Paris Agreement was signed, public support for an ambitious climate agenda has soared. The commitment to deliver on the climate goals has catalysed significant efforts among central and local governments, financial and business communities, and in civil society and professional organisations. This has driven the whole sustainability agenda as demand for measurable results has grown.

The role of governments and regulators in addressing market failures, pricing carbon and natural resources adequately, and requiring corporate transparency is essential to provide the necessary steer to corporate behaviour. Transparency rules and strict greenwashing regulations will help channel finance into sustainable activities.

Leading the way, the European Commission (EC) adopted an Action Plan on Sustainable Finance in March 2018, followed by a strategy in April 2021.27 This strategy laid out an ambitious and comprehensive package of measures to help improve the flow of money towards sustainable activities across the EU. This set of measures, which will be instrumental in making Europe climate neutral by 2050, consists of: 1) a disclosure framework for sustainability-related information, 2) investment tools, including benchmarks, standards and labels and 3) a classification system or “taxonomy” of sustainable activities.

The EU package therefore comprises several acts. These include a new Sustainable Finance Disclosure Regulation28 that defines the rules and principles for sustainable finance for financial market participants and financial advisers. This framework will be supported by the taxonomy, a green bonds regulation and sustainability risk requirements by financial regulators.

Furthermore, the EC has proposed a new Corporate Sustainability Reporting Directive (CSRD)29 that amends the Non-Financial Reporting Directive30 currently in force. The CSRD is built on the premise that ESG issues may have material impacts on an organisation, cements the double-materiality principle, changes reporting from voluntary to mandatory and subjects reporting to verification.

Under the proposal, the EC plans to extend the scope of reporting obligations to all large companies with more than 250 employees and all firms – including non-EU businesses – with securities listed on EU-regulated markets (except listed micro companies). This significantly increases the number of entities that will need to report in the EU from 11,000 under the Non-Financial Reporting Directive to almost 50,000 under the CSRD. In addition, the EC proposal for a directive on corporate sustainability due diligence31 would require businesses to audit their supply chains for adverse human rights and environmental impacts by implementing risk-based, robust and effective supply chain due diligence practices. The package of regulations would require consistent sustainability reporting and responsible corporate behaviour of large companies and throughout their value chains.

The European Financial Reporting Advisory Group (EFRAG) is developing detailed sustainability reporting standards that will be issued as delegated acts.32 EU sustainability standards will closely follow Global Reporting Initiative requirements and will make mandatory reporting a very powerful benchmark to be used by investors and analysts.33

Overall, these measures form part of a broader suite of ESG initiatives to channel investments to environmentally and socially beneficial activities, far beyond the geographical boundary of the EU. Such initiatives aim at facilitating businesses’ alignment with both Paris Agreement climate targets and the United Nations 2030 Agenda for Sustainable Development.

Further convergence of existing standards and frameworks for ESG reporting is expected under the International Sustainability Standards Board (ISSB) set up by the International Financial Reporting Standard Foundation.34 For the first time, there is consensus among the G735 and, to some extent, G2036 groups of nations on the need for consistent climate reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosure and harmonisation of ESG reporting standards.37

What is sustainable investment?

As part of the reporting requirements, the EU and several other international players have been developing taxonomies to define what qualifies as a sustainable investment. This is important to reduce greenwashing and ensure that sustainability reporting is consistent, transparent and verifiable. The EU is developing a common language and a clear definition of what is sustainable by creating a classification system for sustainable economic activities, that is, the “EU taxonomy”.

The EU Taxonomy Regulation,38 which establishes the basis for the EU taxonomy, will require major financial actors and businesses in the European Union to report on their alignment with the criteria of the Taxonomy Delegated Act under the new disclosure regime (see above). An economic activity must meet four overarching conditions and six environmental objectives to qualify as environmentally sustainable. Work is ongoing on social taxonomy, which incorporates “Significant Contributions” and ensures “Do No Significant Harm” principles.

It is important to bring together corporate and market action, government and regulatory pressure, and the vigil of the public’s eye to ensure the delivery of the sustainability goals at a company and at national and global levels.

Ensuring broader engagement for impact creation

The impact of the EU legislation on the financial sector will lead to increased availability and mainstreaming of ESG data. This will come with initial hurdles from preparing ESG reports to data collection. While most of S&P 500 and FTSE 100 companies have published comprehensive sustainability reports in recent years, many businesses in emerging markets are not yet ready to report in line with the evolving standards and frameworks. This has resulted in delays and confusion in ESG reporting.

Demand has been growing in the countries where the EBRD operates for guidance and technical support to develop frameworks, practices and regulations that would help unlock opportunities for sustainable finance. Accordingly, we work with private- and public-sector clients to invest in green and sustainable products, provide training and capacity building, and help develop new laws, regulations and best practices.

The EBRD has committed to align all of its activities with the goals of the Paris Agreement by the end of 202239 and become a majority green bank by 2025. In line with its Green Economy Transition approach,40 the Bank has honed its unique business model (which combines investment, policy dialogue and advisory) to promote a green transition. We support policy initiatives that help our partners assess and integrate material ESG factors into the investment decision-making process.

For illustration, below we discuss how we work with stock exchanges in the EBRD region to raise capacity and help direct capital towards sustainable products and activities.

The EBRD’s policy engagement with stock exchanges41

Stock exchanges play a strategic role in the shift towards more comprehensive ESG disclosure. They enable economic development by facilitating the mobilisation of financial resources and bringing together those who need capital to innovate and grow with those who have resources to invest. Many exchanges worldwide recognise such opportunities, as well as the related risks, and are stepping up their efforts to engage market participants and integrate ESG into mainstream financial practices.42 Stock exchanges continue to be the primary drivers of ESG disclosures in markets where reporting is encouraged or required, with more than 80 per cent of exchanges fulfilling this function.43

As one of the largest investors in its region of operations, the EBRD launched a policy initiative in 2020 to help stock exchanges in the economies where we operate to navigate the various ESG reporting frameworks and requirements that have emerged over the past few years. Business communities in emerging markets have little awareness of this topic and there is a large gap in terms of tools, guidance and training for stakeholders. This initiative aims to close that gap by collaborating with stock exchanges and giving them the necessary materials to be able to educate issuers and investors on ESG.

In May 2021, the Warsaw Stock Exchange – a regional leader in terms of number of listed companies and market capitalisation – published the first ESG guidelines for listed firms developed with EBRD’s technical assistance.44 The guidelines are the first in Poland and Central and Eastern Europe to take into account the latest developments of the EU sustainable finance framework and good industry practices while also remaining reflective of the national context. Local companies and companies from the region, including Bank clients, have started incorporating the guide’s recommendations in their ESG reporting.

Similarly, on 31 January 2022, the Macedonian Stock Exchange (MSE) published its ESG guidelines, developed with the EBRD’s technical support.45 The first in North Macedonia and the Western Balkans region, these guidelines provide practical information for issuers on how to prepare their ESG reports.

ESG Guidelines of the MacedoniaN Stock Exchange

The guidelines are based on the MSE’s Corporate Governance Code of December 2021, which was also developed with EBRD assistance and in coordination with the Securities and Exchange Commission (SEC) of North Macedonia. Reliable disclosure is an essential element of good corporate governance. The new Code, which reinforces the argument that good governance is a necessary element of corporate sustainability, is among the first in the region to introduce specific principles around corporate sustainability and management of the environmental and social impact of business.

Examples of relevant provisions include those on integration of environmental and social considerations in risk management systems and boards’ decision-making, setting a target of at least 30 per cent of women on supervisory and management boards, engagement with stakeholders and environmental and social reporting. Guided by the “comply or explain” principle, companies in North Macedonia will shift their focus towards long-term value creation and sustainable value chains. The new reporting framework will allow the MSE and the SEC to monitor and raise instances of substandard practices or poor disclosure. The Corporate Governance Code, jointly with the ESG Reporting Guidelines, will steer companies to go beyond a “box-ticking” exercise, embed sustainability in their decision-making and provide real value to investors and other stakeholders.46

In the same vein, in 2022 the Bucharest Stock Exchange47 published its first guide providing step-by-step guidance for ESG reporting prepared with EBRD support. The guide acts as a “bridge” between current practice in the local market and the ESG reporting expected to enter into force in the coming years under the proposed EU sustainable finance legislation and its accompanying standards.

Market shift towards a green and sustainable future

In light of the growing pressure for decarbonisation, investors are demanding a radical transformation of business models to manage ESG risks. Better company ESG performance is important for greening financial flows, creating long-term value and connecting with customers and employees. Thus, integration of ESG considerations in decision-making processes is quickly becoming good business practice.

The EBRD is committed to aligning all activities with the Paris Agreement on climate change, promoting the SDGs and supporting its clients and economies of operations in their green and climate transition. As we hurtle through the coming decade, businesses will see the Paris Agreement and the EU sustainable finance package transform from a guiding beacon to a mile-marker in the race to net zero. Limiting climate change and ensuring sustainability was always going to need more than a portfolio tilt, but the new reporting frameworks will create opportunities for companies and investors to change business models, develop effective transition pathways and consider their broader impact.

Historically, we have been working on projects that deliver benefits to nature and biodiversity since our inception as a development bank in 1991. Article 2 of our founding document, the Agreement Establishing the Bank,50 requires us to assist recipient member countries through measures that promote environmentally sound and sustainable development. Meanwhile, across the EBRD’s portfolio, all of the projects we finance must comply with our Environmental and Social Policy (ESP),51 and in particular with Performance Requirement 6 (PR6), which highlights the importance of protecting biodiversity and the sustainable management of living natural resources in the economies where we operate. Projects must also comply with PR3 on pollution prevention and control, combating the emission of harmful substances for the environment, including greenhouse gases.

In 2015, the EBRD adopted the Green Economy Transition approach. The original objective was to increase the financing of projects that advanced the transition to an environmentally sustainable, low-carbon economy. The Bank has subsequently committed to raise its green financing to more than 50 per cent of its annual business volume by 2025 and align all its activities with the objectives of the Paris Agreement.

As a signatory to the European Principles for the Environment,52 together with the European Investment Bank and three other European development banks, the EBRD is already committed to ensuring that our projects are structured to meet applicable European Union (EU) environmental principles, practices and substantive standards. For example, the EU Habitats Directive53 ensures the conservation of a wide range of rare, threatened or endemic animal and plant species. As new EU legislation evolves, the EBRD will apply it in conjunction with our own ESP, regardless of the jurisdiction of the investment.

So a framework for the protection and conservation of nature is already in place. But the recent acceleration of the broader international environmental policy agenda, and the emergence of a growing body of performance standards, laws and regulations in the field of sustainable finance, provide the Bank with a welcome opportunity to re-evaluate and intensify its efforts across the full spectrum of environmental activities. It enables us to look beyond climate change and think more broadly about the impact the Bank’s activities have on our natural environment. As an institution we are looking to move beyond a mindset of conservation and protection, towards holistic risk management (financial and non-financial) and ultimately to the development of a new asset class of “nature-positive” investments.

In this article, we will consider the evolution of law and policy in this field, how the EBRD is working to mainstream nature-positive activities to tackle the environmental crisis and what our contribution might be in the future.

Historically, we have been working on projects that deliver benefits to nature and biodiversity since our inception as a development bank in 1991.

International and European Law: Convention on Biological Diversity, Taxonomy Regulation

Shortly before COP26 opened in Glasgow in November 2021, the first half of the “other” COP took place virtually in October. The United Nations Biodiversity Conference, COP15, gathered 154 of the parties to the Convention on Biological Diversity (CBD), an international treaty that entered into force in December 1993.54

In broad terms, the CBD focuses on the conservation of biodiversity and the sustainable use of the components of biodiversity, defined as the variability among living organisms from all sources including terrestrial, marine and other aquatic ecosystems, and the ecological complexes of which they are part. According to the World Economic Forum, humanity has already been responsible for the loss of 83 per cent of wild mammals and half of all plants, while one million species are at risk of extinction in the coming decades.55

The economies where the EBRD operates are diverse in their geography and habitats and face a range of environmental challenges, from airborne emissions to climate change, soil degradation and water pollution. In the Palearctic region where EBRD economies are located, species population declined by more than 30 per cent between 1970 and 2014.

The EBRD regions also encompass some of the most pressured seas including the Aral, one of the largest human-made environmental catastrophes of the 20th century. The environmental degradation along the Mediterranean, Black Sea and Atlantic coasts due to overfishing, untreated waste and real estate overdevelopment represents a major human and environmental threat at the heart of our region.

At CBD COP15, all parties committed in the Kunming Declaration56 to develop, implement and monitor an effective post-2020 framework that will put biodiversity on the path to recovery by 2030 and achieve the vision of “living in harmony with nature” by 2050. This is consistent with the Leaders’ Pledge for Nature,57 announced in September 2020 and now endorsed by 93 governments, to reverse biodiversity loss by 2030; and the EU’s biodiversity strategy for 2030.58

Also at the EU level, the Taxonomy Regulation59 is the central plank of the bloc’s sustainable finance legislation. In force since July 2020, it contains the EU’s attempt to answer the question: what does “green” mean? Or rather, what constitutes an environmentally sustainable economic activity?

Article 9 of the EU Taxonomy Regulation sets out six environmental objectives, one of which is protecting and restoring biodiversity and ecosystems.60

To qualify as an environmentally sustainable economic activity, an activity must “contribute substantially” to one of the objectives, “do no significant harm” to any of the objectives, be carried out in compliance with certain minimum safeguards (focusing particularly on human rights) and comply with technical screening criteria published by the European Commission.

This conceptual framework provides a useful mechanism for considering situations where there may be tension between competing environmental objectives. For example, when the construction of a renewable energy facility is proposed in an area of natural beauty, it may be that the potential for “significant harm” to biodiversity and ecosystems outweighs the “substantial contribution” to climate change mitigation. In other situations, achieving an environmental objective might be counterbalanced by human rights concerns, such as where benefits in the production of certain agricultural products are compromised by forced or child labour issues in their supply chain.

The EBRD follows an equivalent approach for its green finance investments, considering joint MDB climate finance and/or other environmental objectives alongside compliance with its ESP and the 10 performance requirements. The latter set the minimum standards for managing environmental and social impact and the risks caused by projects, and establish the strategic goal of promoting net benefits. The performance requirements cover areas from labour, health and safety, and stakeholder engagement to pollution prevention and biodiversity protection.

Natural capital and the Dasgupta Review

From a policy perspective, one of the leading texts in this area is the Dasgupta Review, a study commissioned by the UK Treasury entitled The Economics of Biodiversity,61 for which the EBRD provided comments. The study highlights the importance of “natural capital”, defined as the stock of renewable and non-renewable natural assets (for example, ecosystems) that yield a flow of benefits to people (that is, ecosystem services). The term is used to signify that nature is intrinsically valuable because it provides the resources and environmental services upon which peoples’ well-being and economic activity rely, and should therefore be treated as an asset base whose value needs to be preserved and enhanced.

This well-being refers not only to that of the current population, but also of future unborn generations who will need to draw on the stock of natural assets for their own welfare and economic activity. In fact, research by the World Economic Forum suggests that US$ 44 trillion of economic value generation – representing more than half the world’s total gross domestic product – is moderately or highly dependent on nature and its services.

Introducing the concept of natural capital is important from a banking perspective because it enables institutions like the EBRD to begin to measure and monitor the impact that a project might have on nature. Consider, for example, the development of a coastal or mountain resort to which we attribute an initial natural asset value of x, yielding yearly returns of y. (Those returns could be physical, in the form of “ecosystem services” such as fresh air, clean water and agricultural produce, as well as monetary, in the form of revenue streams for governments and local communities). With sustainable tourism policies in place, it should be possible to maintain returns at y or even increase them, and enhance the value of the natural asset value above x. However, if poorly managed or overexploited from a sustainability perspective, the asset may temporarily provide y returns, but its value would be rapidly depleted below x, eroding returns in future years permanently below y.

The EBRD is leading a combined effort by a number of multilateral development banks to put in place a methodology for assessing the value of biodiversity and natural capital in the ecosystems where we operate. This work tries to ascribe an economic value to the services ecosystems provide to society and then feed that value into the decision-making of key economic actors. Previously, the lack of any natural capital valuation methodology meant that biodiversity was typically treated as an externality and given a null residual value in economic models, thus being ignored in socio-economic decision-making. To avoid this “tragedy of the commons” on climate, MDBs have successfully implemented a similar approach with their shadow carbon pricing methodology. In addition, valuing biodiversity and natural capital is an essential step to assessing and disclosing nature-related risks associated with projects and clients.

Disclosure obligations for companies

Year-on-year, corporates and banks are required to disclose increasing amounts of information about the environmental impact of their operations. In the EU, which includes 12 of the economies where the EBRD operates, the Non-Financial Reporting Directive (NFRD)62 already imposes obligations on 11,000 of the bloc’s largest companies, which must publish an annual management report containing disclosure on environmental matters (among other things). In its review of EU environmental disclosure in 2020,63 the Climate Disclosure Standards Board observed that only 46 per cent of companies reporting under the NFRD had included biodiversity disclosure, and subsequently published specific guidance for firms on this issue.64

The European Commission published a proposal for a Corporate Sustainability Reporting Directive (CSRD)65 in April 2021. Extending the scope of the requirements to all EU listed companies – some 50,000 entities in total – the CSRD is scheduled to apply to large firms from 1 January 2023 and to listed small and medium-sized enterprises from 1 January 2026, and will require much more detail than the NFRD. See the previous chapter for further details on the NFRD, the CSRD and disclosure issues more generally.

The CSRD will introduce mandatory reporting standards. The information disclosed will need to cover the full range of environmental matters, including biodiversity and nature. In November 2021, the IFRS Foundation Trustees announced the formation of a new International Sustainability Standards Board (ISSB)66 to develop a comprehensive global set of sustainability disclosure standards.

The European Commission has asked the European Financial Reporting Advisory Group (EFRAG)67 to represent European views in the preparation of the ISSB’s draft standards, which are scheduled for adoption in October 2022 and are expected to mirror the environmental objectives of the Taxonomy Regulation.68 EFRAG’s work to date includes developing a draft European Sustainability Reporting Standard on Biodiversity and Ecosystems.

EBRD representatives are closely involved in shaping the future regulatory landscape, contributing to a number of the bodies and initiatives described above. Our contributions have been focused on aspects that are most relevant to our mandate to promote environmentally sound and sustainable development, particularly in the private sector, across the EBRD regions.

The Bank is part of several working groups helping to develop the EU Taxonomy for Sustainable Finance and the technical screening criteria that define the economic activities that can be considered sustainable, in line with the six environmental objectives. EBRD experts are members of EFRAG and the Bank is represented on two of the expert working groups: environment (excluding climate change) and governance.

We have also contributed to the work of the ISSB in preparing the standards themselves and specifically to its Biodiversity Working Group.

Looking beyond the EU, the Taskforce on Nature-related Financial Disclosures (TNFD)69 was created in September 2020 to develop a risk management and disclosure framework for organisations to report and act on evolving nature-related risks. Even while the TNFD was being conceptualised, the EBRD participated in the informal expert working groups that led to the creation of the taskforce. The project’s ultimate goal is to shift global financial flows away from nature-negative outcomes towards nature-positive outcomes. This mirrors the example of the Taskforce on Climate-related Financial Disclosures, created in 2015 by the Financial Stability Board to develop consistent, climate-related financial risk disclosures for use by companies, banks and investors in providing information to stakeholders.

The TNFD produced a work plan in June 202170 that envisages the development of a set of standards and their launch in the market from 2023.

Meanwhile, the EBRD as an institution participates in the TNFD Forum, alongside other development and commercial banks. The forum has a consultative role and liaises closely with the working group, providing feedback at key stages on the path towards implementation. We are also collaborating with Agence Française de Développement and the other multilaterals under the TNFD Development Finance Hub to promote a better understanding of biodiversity-related risks and share risk disclosure, case studies and sectoral experience. The biodiversity and natural capital valuation work fits within those efforts to find a common approach among multilateral institutions for the assessment and disclosure of nature-related risks.

EBRD representatives are closely involved in shaping the future regulatory landscape, contributing to a number of the bodies and initiatives.

Outlook for future developments, “nature-positive” investments

Across these initiatives our work is informed by the experience of developing the EBRD’s own policies and instruments over our 30 years of operations.

So what should the Bank do better, or more of, in the coming months and years?

The MDB joint nature statement at COP26 provides a suitable roadmap for action. We have undertaken i) to show leadership in achieving the objectives set out in the key international treaties in this field, ii) to develop and make “nature-positive” investments, and iii) to foster synergies between the governments of different countries and regions, and between the private and public sectors. We have also undertaken iv) to help our clients value nature and natural assets to deliver development benefits and v) to develop tools and methodologies for tracking nature-positive activities across our portfolio, then report on our efforts publicly.

We expect that developing and identifying nature-positive investments will lead to many innovative and exciting projects. This should involve both specific investments in nature-based solutions, such as the creation of an orbital forest around Tirana, and by changing the parameters of projects to prioritise conservation and mitigation activities, thereby generating net gains in natural capital and biodiversity.

Our bankers are speaking with clients across the EBRD regions in the agribusiness, municipal and property and tourism sectors, to name just a few, about different investment structures. For example, an agriculture business could be incentivised to progressively eliminate its water pollution discharge by entering into a sustainability-linked loan where the coupon payment steps up or down depending on the company’s achievement (or otherwise) of a specific key performance indicator. Elsewhere, a public-sector infrastructure project could involve the “construction” of a mangrove swamp or forest, with benefits from reduced coastal erosion to improved air quality and the introduction of additional species to an ecosystem.

The creation of platforms where different stakeholders find synergies and collaborate to achieve systemic impact will be essential. This was achieved in the Baltic and Barents seas after the Helsinki Convention was established71 and the Northern Dimension Environmental Partnership created. And we now have the opportunity to replicate this environmental remediation work in the Mediterranean, Black and Red seas, strengthening the Barcelona Convention.72

Meanwhile, our environmental specialists are already working with other multilateral development banks on biodiversity accounting and natural capital valuation. This may provide the grounds to develop a shadow nature pricing to internalise nature-related externalities in our decision-making process. The approach would mirror the established shadow carbon pricing and could be integrated in our environmental and social due diligence processes. This joint multilateral work should also lead to the use of new technologies, such as the use of technological advances in DNA to improve understanding of ecosystem function and resilience, and satellite images to foster better and broader disclosure of project-related biodiversity data and impacts.

We will continue to contribute to the development of disclosure and risk management frameworks for nature and biodiversity, drawing on our experience in assessing biodiversity and resource impact under PR6.

Of course, there will be challenges along the way. Regulatory fragmentation and the emergence of rival taxonomies and standards at different levels of ambition could lead to uncertainty for our clients and for stakeholders in general. Tensions between competing political agendas and irreconcilable environmental and social objectives could result in important and useful projects being delayed or cancelled. And the sheer pace of regulatory change could lead to an increase in reputational risk and the risk of litigation for participants.

But the direction of travel is clear, and the EBRD will continue to communicate with its clients and contribute to the evolution of the legal and regulatory framework in the coming years. Our aim is not only to protect and conserve nature and biodiversity, but to develop and enhance them in a way that benefits nature, the people across the EBRD regions and the planet.

Our aim is not only to protect and conserve nature and biodiversity, but to develop and enhance them in a way that benefits nature, the people across the EBRD regions and the planet.