Unlocking sustainable finance: overcoming climate data challenges in CEE’s banking sector

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The European Investment Bank (EIB), as the coordinator of the Vienna Initiative’s working groups on climate change and financial stability in Central and Southeastern Europe, reported that “underinvestment, particularly in climate change, is a significant impediment in CEE.”

Higher climate exposure, yet climate risks are not sufficiently incorporated into stress-testing frameworks 

CEE countries face heightened exposure to the risk of heat and water stress compared to other EU countries. Think tank E3G noted that, for example, Romania already faces more frequent heatwaves than other parts of the EU and these are projected to increase further by 50-80 per cent in frequency and 30-80 per cent in duration shortly.

All these impacts imply massive costs and financial burdens on the national budget and individual households and the banking sector lags in the adoption of climate risk management practices.

Despite being especially true for the CEE region, it is overall a European problem. The 2022 climate risk stress test of the European Central Bank (ECB) showed that banks do not yet sufficiently incorporate climate risk into their stress-testing frameworks and internal models.

“Euro area banks must urgently step up efforts to measure and manage climate risk, closing the current data gaps and adopting good practices that are already present in the sector,” said Andrea Enria, Chair of the ECB’s Supervisory Board.

The results of the test showed that around 60 per cent of banks do not yet have a climate risk stress-testing framework. Similarly, most banks do not include climate risk in their credit risk models and just 20 per cent consider climate risk as a variable when granting loans. The test also proved that almost two-thirds of banks’ income from non-financial corporate customers stems from greenhouse gas-intensive industries.

A push to assess climate-related risks can come exactly from banks. For example, when it comes to the Hungarian market, it was noted that access to cheaper finance and reputational gains are the most common factors pushing companies towards ESG (Environmental, Social, Governance).

Krisztina Kulcsárné Dr Takács, Chief Financial Officer of SolServices, a Hungarian company specialising in the development and implementation of renewable energy generation project portfolios, told CEENERGYNEWS that there are still gaps in societal awareness about the benefits of climate policies, highlighting the need for more educational campaigns and an open governance structure of companies.

She added that when comparing green and non-green projects, there are three key elements: access to finance, the market pricing difference and banks’ cheap source of financing (like EU or local targeted institutional programmes) – in all three areas, green projects offer far greater opportunities.

Climate-related data availability: the most significant challenge

With CEE lagging in many sectors, is it possible that it is also creating a gap between its green financing services and Western European ones? Especially in a moment in which awareness of the importance of climate change is building momentum and regulators and policymakers are paying more attention to the subject.

According to the EIB recently-published report, Greening the Financial Sector, A Central, Eastern and South-Eastern European Perspective, climate-related data availability and quality for banks have been identified as one of the most significant challenges in the transition process.

Indeed, even though large corporations are setting the example by sharing climate change-related data, small and medium enterprises (SMEs) in the region do not generally collect relevant information and their awareness of the topic is generally limited.

“The report underscores the critical role of the financial sector in driving the transition to a more sustainable economy and achieving the EU’s green transition goals,” said EIB Vice-President Ambroise Fayolle. “Coordinated efforts to unlock the potential of sustainable finance in the CESEE region are crucial for driving sustainable development.”

The report found that one reason for poor data availability is that obtaining useful data is costly for banks and their customers. It is very important to take into account facts that often vary depending on the geographical location or the exact characteristics of the firm involved (how a company is emitting greenhouse gas, the mix of energy sources used in the generation, emissions embedded in the whole value chain and so on).

The study is suggesting major commercial banks pursue their programmes of collecting relevant information from clients and analysing that information in a way that is fully useable for risk management and strategy formulation. Moreover, much work is needed to increase awareness of climate change issues among bank clients and then build skills, knowledge and processes.

Decarbonising the electricity sector and boosting energy efficiency require a significant increase in investment

The lack of data and public awareness especially emerges when addressing two main challenges in the CEE region: decarbonising power generation and boosting energy efficiency in buildings.

Surely, rapid decarbonisation of the electricity sector in CEE requires a significant increase in investment, mostly in capital-intensive assets. Access to low-cost, long-term sustainable finance is critical. However, there are many risks still. For example, mitigating price risk to access long-term debt markets (which is not even limited to the power sector alone but also involves other important technologies and solutions like batteries and storage).

How can this risk be mitigated? The Vienna Initiative’s working groups suggest designing markets that allocate risk to parties best placed to bear it, highlighting the continued need for government-backed contracts for differences.

Another risk that is especially perceived in the region is the lack of credibility of certain targets, considered unreachable in technical terms (for example, a high share of renewables) or because too expensive (nuclear or hydrogen), or because the social consequences or energy security cannot be addressed (policies to phase out coal or impact on energy prices). In other words, some investors may anticipate that government targets will not be met on time.

Also, energy efficiency is instrumental for achieving climate action objectives in CEE. However, only around one-third of firms in the region take measures to improve energy efficiency. Similarly, building renovation by households is far from targeted levels.

In particular, there is a lack of minimum performance standards for existing buildings, a lack of consistency between the EU taxonomy requirements for new buildings and energy performance certificates and a lack of harmonisation of energy performance certificates and so on.

Many commercial banks face uncertainties regarding energy efficiency investments since they represent, in many cases, a relatively new asset class. Also, homeowner associations or condominiums, whose participation in energy efficiency renovations is vital are not taken into consideration by most commercial banks and financial institutions.

In an interview with CEENERGYNEWS, Lara Tassan Zanin, former Head of the EIB Group office in Romania said to be hopeful that more energy efficiency investments would materialise for households and public buildings, municipality buildings, schools, hospitals and universities.

Regarding households, Ms Tassan Zanin underlined that most of the EIB investments are happening in Bucharest, where there are bigger buildings with a large number of tenants, whose majority is required to approve any kind of renovation. So far there were only two ways to make these renovations work: either by using a mortgage loan when buying the house or increasing the mortgage at a later stage.

“We are working with the banking sector to offer consumer loans with a 7-8 year maturity (instead of 5 years) in case loans are used for energy efficiency works, so that instalments can be smaller and more people can afford these renovations,” she highlighted.

However, she also noted how we need much more attention to consume less and more efficiently “and more openness and interest in setting up financial instruments to support energy efficiency investments.”

In this regard, transition plans are emerging as a key tool for financial institutions and non-financial corporations wishing to achieve their climate targets. The above-mentioned report started by saying that to build a successful transition plan, clear objectives and priorities must be defined. In the case of financial institutions specifically, it means following the Glasgow Financial Alliance for Net Zero and the related decarbonisation priorities, which include financing or enabling entities and activities that develop and scale climate solutions or supporting those aligned to a 1.5° Celsius pathway. Such a plan should also engage with relevant stakeholders and include specific, measurable targets, for investors to minimise their risks. Finally, as for the whole energy transition, accountability and responsibilities must be stated clearly as we will all be part of this change towards new and sustainable business models.

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