Advocates of proposals that would severely limit banks’ ability to finance new fossil fuel projects are increasingly confident about their adoption by the European Parliament in the next few months, following support from a group of cross-party lawmakers.
The European Parliament is considering amendments to the Capital Requirement Regulation, which looks at prudential requirements for credit institutions. One of those proposals has specifically called for full capital funding for new fossil fuel assets.
The measure, first proposed in a report by the non-profit Finance Watch two years ago, is designed to sit within Pillar 1 of the Basel Capital Adequacy Accords, and calls for a 1250% risk-weighted capital requirement for the financing of new fossil fuel projects.
Disincentive to lending
Under Basel III rules, banks’ capital is meant to be at least 8% of assets. Assets that are considered riskier are assigned different weightings in the calculation of what minimum level of capital is required to cover potential losses.
Exposure to assets that have a 1250% risk weight would mean that banks need to hold enough capital to cover 100% of those assets’ value. This would be a substantial disincentive to engage with those types of activities.
“With amendments for a 1250% risk weight for new fossil fuel exposures submitted by the [Progressive Alliance of] Socialists and Democrats [and broader support from] the Greens and Renew Europe, the likelihood of seeing an agreement in the European Parliament on the subject has increased significantly,” said Thierry Philipponnat, chief economist at Finance Watch. “If adopted, this measure [...] would reduce considerably the probability of seeing the climate crisis trigger a new financial crisis.”
James Vaccaro, executive director of the Climate Safe Lending Network, who also supports the proposal, said: “The 1250% measure is emblematic of the tools we need to avert catastrophe. It doesn’t force anyone to do anything. But it does target exactly those projects which will do most damage in the coming years.”
More effective approach
Mr Vaccaro added that this approach was more effective than that of the EU’s green taxonomy, which imposes burdens on those companies that are “trying their best” to transition but whose activities are still labelled as ‘brown’.
Approval from the parliament’s Economic and Monetary Affairs Committee should suffice without a vote in a plenary session. If it passes this hurdle, approval of the measure would then be negotiated in so-called trilogue discussions involving EU member states, the European Commission and parliament late this year or in early 2023.
Mr Philipponnat said that the character of parliamentary amendments shows that lawmakers from some member states will either throw their weight behind the measure or, at least, not oppose it.
He noted that in the UK, the Bank of England’s Prudential Regulation Authority has also supported this type of measure, suggesting the country’s regulators could follow the EU’s lead.
In June, there was disappointment when the Basel Committee on Banking Standards report on climate-related risks failed to mention the capital funding idea for new fossil fuel projects, despite backing this approach for cryptocurrencies. Mr Philipponnat said it may now only be a matter of time before the Basel Committee builds a consensus for the measure.
This article first appeared in Sustainable Views, the Financial Times Group’s platform on ESG policy and regulation.
