The Green Deal: The regulators’ masterpiece on a climate neutral Europe in 2050 – A call for banking business adaptation

By Christine Würfel, RBI |

Christine Würfel

The European Commission´s Green Deal aims to make Europe the first climate neutral continent by 2050. Several measures are  already and will be introduced ranging from effective carbon pricing, clean energy, mobilizing industry for a clean and circular economy, energy efficiency in buildings, an environmentally friendly food system or the preservation of biodiversity.

In this concept, the financial services industry is foreseen to serve as facilitator of reorienting capital flows towards a more sustainable economy. Sustainable Finance is a key issue for 2020 and up-coming years; the aim is to prepare RBI Group for these regulatory, political and market developments. The topic is particularly relevant for RBI Group customers to support their transformation to green. Especially in the home market, the CEE region, RBI Group sees the importance to support the transformation. By carefully analyzing the regulatory initiatives, we aim to achieve the optimum for us and our customers, making sure that the one who want to contribute can participate in this important transformation process. Since the topic of sustainable finance affects all areas of the bank, a comprehensive and linked reference is required.

Such a linked approach is also reflected in the Commission´s Action Plan:

  • the introduction of ESG (Environment, Social and Governance) criteria in the portfolio management and limit setting which must reflect the so called “taxonomy” (uniform criteria for determining whether an economic activity is environmentally sustainable)
  • the inclusion of physical and transition risks into the risk management for ESG stress testing exercises
  • new ESG disclosure requirements for financial products and entities to increase transparency on climate and environmental data and market awareness
  • Standardization of Green Bonds and Ecolabelling for retail investment products

The European discussion also focuses on the question on intensifying sustainable or penalizing non-sustainable activities. The European Commission`s “Green Supporting Factor” would allow a lower risk weight for green assets. It is controversially discussed. The Austrian Government Program supports such a factor, opponents state that a capital relief without objective relation to risk content leads to maladministration. But a supporting factor does not substitute the creditworthiness assessment that is required.  Banks are financing the economy to a large percentage within Europe, not the Capital Market. This fact is very crucial answering the question “how to motivate market participants in financing sustainable activities in the near future”. The introduction of an incentive system is necessary given the short timeframe and urgent need to accelerate the shift towards sustainable economy. A well risk-considered Green Supporting Factor would allow banks to reduce their RWAs for sustainable loans to a certain degree. This would leverage and prioritize green bank lending and support sustainable growth. There are also prudent research reports[1] stating that companies that do better on ESG criteria also perform better financially. In the light of increased capital requirements by Basel IV and the need that banks shall act as facilitator for sustainable growth, there should be a careful regulatory balance. A report by the Bank of England[2] states that mortgages against energy-efficient properties are less frequently in payment arrears. As the first National Bank within the EU, the Hungarians have launched a capital requirement support scheme for green residential mortgages end of last year[3] by promoting loans for buying or building energy efficient homes or renovating buildings to achieve better energy performances. According to their hypothesis the credit risk of green loans is lower due to lower utility costs and a higher “green” value of the energy efficient homes. Such innovative solutions could create a real merit in designing dedicated green (energy efficient) loan products instead of only neglecting the incentive arguments.

Future financing should accelerate clean energy innovation, efficiency and renewables. The topic is key for the financial industry. And given the fact that the EU´s investment plan will unlock EUR 1 trillion of climate action in the decade to 2030, there should also be some business opportunities, and not only additional requirements.

Christine Würfel is responsible for RBI Group`s Regulatory Competence Centre on Sustainable Finance  

 

[1] University of Zurich, Center for Sustainable Finance and Private Wealth (CSP): https://www.tandfonline.com/doi/full/10.1080/20430795.2015.1118917; Oxford University; https://arabesque.com/research/From_the_stockholder_to_the_stakeholder_web.pdf.

[2] https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/does-energy-efficiency-predict-mortgage-performance.pdf?la=en&hash=CC1DED249BFE86DB22A1AE70429BF235EA0325D8

[3] https://www.mnb.hu/greenfinance/english

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