Finance Ministers agree to assess brown and green factors for banks’ capital requirements
Capital requirements for banks serve to reduce the risk of default. are in place to ensure banks' assets. These requirements should as such reflect long-term risks to asset price values and potential systemic risks. To date though, banks have not properly been disclosing climate-related risks, nor are such risks adequately monitored by financial regulators.
This morning, the ECOFIN Council agreed on measures to change this, as part of the EU’s ‘Risk Reduction Measures package’. Three new sustainability measures of the Capital Requirement Directive and Capital Requirement Regulation for banks were put forth:
1. A report from the European Banking Authority in the next two years on potential brown and green factors for banks’ capital requirements;
2. A report from the European Banking Authority in the next two years on the potential inclusion of Environmental, Social and Governance (ESG) risks in the review and evaluation performed by financial regulators; and
3. Mandatory disclosure of ESG risks for banks in three years.
Sebastien Godinot, Economist at WWF European Policy Office said of today’s Council decision: “The ECOFIN Council decision on these two European Banking Authority reports is an important and necessary step to assess the financial risks posed by climate-related and other ESG impacts, notably the risk of stranded assets. The mandatory disclosure of climate and ESG-related risks for banks is another important advancement.
WWF recommends that these measures now be reflected in the ‘European Supervisory Authorities package’ currently under discussion. “It is critical that European Supervisory Authorities (ESAs) develop climate scenario analysis to assess the impact of climate and ESG risks on the financial stability of institutions in the short, medium and long term” added Godinot.
Senior Communications Officer, WWF European Policy Office