ETS, energy transition and climate risk

Italian Sustainable Investment Forum

ETS review, new measures for electrification and integration of climate risks

After a first part of the year marked by the simplification of the European sustainability regulatory framework, attention is gradually shifting to implementing the new rules and financing the transition.

ETS: towards a new phase for the European carbon market

The European Commission has presented its proposal to revise the EU Emissions Trading System (EU ETS), which the European Parliament and the Council of the EU will now examine. The proposal updates the linear emissions reduction factor and introduces a more gradual trajectory towards the EU’s climate targets. It pays particular attention to financing decarbonisation. The proposal envisages a new Industrial Decarbonisation Bank, with a capacity of more than €100 billion, an ETS Investment Booster and the continuation of the Innovation Fund. At least 50% of national ETS revenues should also be allocated to decarbonising the sectors covered by the system. Free allowances would continue beyond 2030 but would be increasingly conditional on the development and implementation of decarbonisation plans and investments. Other new measures include integrating permanent carbon removals and reviewing the Market Stability Reserve, with the aim of preserving market liquidity, reducing excessive volatility in allowance prices, and creating more predictable conditions for investment.

Electrification: new investments for the transition

At the same time, the Commission has presented an Electrification Action Plan to increase the share of energy demand met by electricity from the current 23% to 46% by 2040. The strategy seeks to accelerate the replacement of fossil fuels with clean electricity across industry, buildings and transport. In practical terms, the Plan includes measures on taxation and network charges to narrow the cost gap between electricity and fossil fuels, as well as measures to reduce the upfront costs of investments in industrial electrification, heat pumps, electric mobility and batteries. Infrastructure development will also be central, from grids and connections to storage and power system flexibility. To support investment, the Commission aims to mobilise several EU instruments, including the Social Climate Fund, resources generated by the ETS and the new Industrial Decarbonisation Bank. For the financial sector, this broadens the potential universe of transition-related investments, encompassing not only renewable energy generation but also the infrastructure and technologies needed for the economy's progressive electrification.

ECB: climate risk enters collateral valuation

The European Central Bank (ECB) continues to integrate climate risks into its risk management tools. The ECB has decided to extend the climate factor used in the Eurosystem collateral framework to certain credit claims on non-financial corporations, to protect the Eurosystem against potential losses in value resulting from climate transition shocks. The underlying principle is that greater exposure to transition-related uncertainties will result in a larger reduction in the value assigned to the collateral. The assessment will consider the risk associated with the economic sector, the debtor’s exposure to the transition and the remaining maturity of the credit claim. The additional reduction may reach a maximum of 5%, and the measure will be implemented no earlier than the end of 2027. The measure represents a further step towards integrating climate risk into the Eurosystem’s standard financial risk management tools.

New ESRS and voluntary sustainability reporting standard

On the reporting front, the European Commission has adopted delegated acts on the new simplified European Sustainability Reporting Standards (ESRS) and the voluntary sustainability reporting standard for companies outside the revised scope of the CSRD. The new ESRS will apply to financial years beginning on or after 1 January 2027, with the possibility of early application for the 2026 financial year. Their adoption is a key step toward simplifying the European sustainability reporting framework.