New ECB Research: ESG Regulation and Capital Flows to the Green Transition

As Europe advances its sustainability agenda, the financial sector plays a key role in funding the transition. But what happens when sustainability goals require investment in industries that aren’t fully ESG-compliant?

A new ECB working paper examines how EU ESG regulations—specifically the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy—affect banks’ capital allocation to mining companies supplying critical raw materials for electric vehicle batteries, such as lithium, cobalt, manganese, and nickel.

Key findings:

• ESG regulations have reduced banks’ public holdings in mining companies, especially those with weaker ESG scores;
• There is no significant impact on these companies’ cost of capital or overall lending behavior—yet.

This raises important questions about potential trade-offs in the green transition: can we scale sustainable technologies if their supply chains are constrained by ESG-aligned capital flows?

Read the full paper on the ECB’s website: https://www.ecb.europa.eu/home/html/index.en.html