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Photographer: Hollie Adams/Bloomberg Photographer: Hollie Adams/Bloomberg

The fight against climate change involves more than towering wind turbines and glitzy electric sports cars. It’s also being fought in the fine print of financial regulations. The European Union is embedding environmental goals in standards for banks, money managers and insurers, in the hope of directing trillions of euros to fund a radical revision of the region’s economy. Skeptics warn that some of the changes could lead to spectacular losses instead. And a dispute over whether to include nuclear power among investments deemed suitably green shows just how fraught even some technical-seeming efforts can be.

1. Why is this happening?

The EU is committed to meeting the targets of the Paris Agreement, and with new leaders just taking their posts, its ambitions are higher than ever. In her first major policy announcement, European Commission President Ursula von der Leyen presented her plan to turn Europe into the world’s first climate-neutral continent. The sweeping economic transformation that’s needed to achieve this goal won’t be cheap, and regulators have acknowledged that it will require significant private investments.

2. What kind of rules are involved?

The effort involves more than just rules. A crucial component of what might be called a regulatory infrastructure is the development of a green finance taxonomy -- a set of categories and definitions. Sounds dry as dust, but markets require clarity and that requires a common language. In particular, that means defining what activities are considered “green” and what aren’t. That’s important for stamping out “greenwashing” -- calling products sustainable even if they don’t really help fight climate change. Policy makers in Brussels have agreed on how this list will be written, after settling a last-minute tussle over whether nuclear energy should be considered a sustainable activity. Their compromise means it could potentially be classified as a way to support the transition to net-zero emissions, but more analysis is needed first.

3. What are other proposals?

Money managers are being told to disclose how they incorporate sustainability factors into investment decisions. This is meant to increase transparency for investors who want their money to help -- or at least not hurt -- the environment.

Low-carbon benchmarks, like indexes created to track companies with a low carbon footprint, are being set up to make it easier to steer funds to environmentally friendly investments.

make it easier to steer funds to environmentally friendly investments. To encourage green lending, bank regulators may lower capital requirements for these projects.

4. What do the efforts say about companies seen as polluters?

Banking supervisors are scrutinizing the environmental risks that remain on balance sheets and could impose extra capital demands to offset possible losses.

Banks may need to assess environmental risks facing borrowers before they lend.

The Bank of England is eyeing a comprehensive test of banks and insurers that would ask firms to estimate the impact of global warming on mortgages, corporate loans and other parts of their balance sheets. The European Banking Authority is also exploring how to incorporate climate change into stress tests of banks.

5. Will these new regulations do the trick?

That’s not clear. Europe needs as much as 290 billion euros ($323 billion) per year in additional financing to reach the goal of a climate-neutral economy by 2050, according to the commission. Setting clear rules of the road in green investments can help make that possible, not just in the EU but around the world, if EU standards become widely followed. But bickering between national governments over the details and the slow pace of rule-writing and implementation could make the goal harder to meet. Many of the regulatory efforts are just in the proposal or discussion stage. And Brexit could make things more complicated if the U.K. decides to follow a different approach.

6. What do proponents say?

That this is an all-hands-on-deck moment in Europe, so regulators must work closely with elected politicians to achieve climate change goals. Non-profit organizations working to galvanize public attention are pushing to make sure regulatory efforts -- especially the taxonomy -- remain based in science and aren’t skewed by political horse-trading.

7. What does business think of it?

After a decade of post-crisis regulations, many firms are happy to be at the table discussing sustainable finance with authorities -- and the possible new business opportunities the green road may offer. Not all executives, however, are keen about every proposal. Jean Pierre Mustier, chief executive of UniCredit SpA, has warned authorities against lowering capital requirements for green projects because it could create risks in the banking industry. Fitch Ratings said preferential treatment for sustainable investments could underestimate the financial risks of borrowers. European Central Bank officials have also said that banking supervision should focus on the risks faced by regulated firms instead of political goals.

8. When will all this happen?

Not tomorrow. Sustainable finance is a new way of regulating the industry and requires fresh approaches in various areas. One of the biggest hurdles to overcome is missing data. Companies don’t necessarily report all the information that the market needs to assess the environmental aspect of a bond or a stock. The taxonomy, or green list, will also need time to fully develop into a working catalog. And on the consideration of climate risks, the conversation of how they should be dealt with by financial regulators is only starting. The European Banking Authority says it anticipates “delivering a significant amount of work between 2019 and 2025.”

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