Under the title ‘Towards a Green Finance Framework,’ the European Banking Federation published on 28 September 2017 a report that assesses the role of the banking sector in the context of the discussion on green finance.
European banks have a major role in the financing of the economy. Even as market-based financing gains a bigger share of the financing needs of companies in Europe, banks will continue to play an important role not only in terms of traditional lending but also in a range of intermediary functions and in their role as investors. With this major role comes responsibility.
As a facilitator of the economy, the financial system overall has a significant impact on the sustainability of the European economy along with the three dimensions of sustainability: environmental, economic and social. Finance itself, taking into account these dimensions, can only be considered sustainable when serving the needs of sustainable development activities over their whole lifecycle.
The EBF report focuses on the technical, legal and regulatory aspects of one of the three dimensions: environmental sustainability, within the context of transformation to a two-degree economy. The EBF will address the other aspects of sustainability separately.
Key recommendations from the EBF on green finance
- Alignment of long-term EU sustainable finance developments with political objectives clarity and certainty of policies and regulatory environment and an appropriate industrial strategy.
- Development of a common taxonomy, set of principles and minimum standards (based on existing international standards and initiatives such as green bonds and green lending principles) and a disclosure framework consistent with the TCFD recommendations.
- Implementation of an EU environmental and climate change (ECC) risk categorising system by economic sectors/sub-sectors for ECC screening to provide a sound and reliable basis for setting high-level policies for credit allocation.
- Banks to foster retail investors’ understanding of sustainable projects’ positive consequences.
- Public entities to share risks for which there is no market and to provide technical assistance.
- Introduction of subsidies (tax benefits or subsidised funding conditions)/phase-out of inappropriate subsidies.
- Monetary policy measures, (e.g. accepting certain green assets as collateral for central bank loans).
- Dissemination of data to speed up and standardise performance risk analysis; development of standard contracts for various types of green projects.
- Integration of the ECC risk mitigation in banks’ risk strategies and risk management.
- Regulatory and supervisor framework to acknowledge environmental risks and to focus on systemic risk and risk of individual non-sustainable assets (common ECC scenarios, stress testing).
- Considerations of changes to prudential regulations based on the risk sensitivity and evidence of the macroprudential benefits of green assets in reducing the probability of the climate-related risks (e.g. capital treatment that varies over time to encourage financing of origination of sustainable assets and their subsequent refinancing in the capital markets, changes to Capital Requirements Regulation (CRR2) re liquidity coverage ratio (LCR) and net stable fund ratio (NSFR) to reduce liquidity constraints for medium to long-term green funding and green supporting factor).
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