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January 30, 2023

Explainer: MEPs vote on bank ESG disclosures and ‘one-for-one’ rule

MEPs back ESG risk disclosures for banks but fail to support a rule requiring them to finance new fossil fuel activities solely from their own capital. 

Members of the European Parliament’s Committee on Economic and Monetary Affairs (Econ) voted on January 24 to back changes to the EU Capital Requirements Regulation and the Capital Requirements Directive to implement the Basel III agreement, aimed, among other things, at strengthening reporting and disclosure requirements for risk related to environmental social and governance factors.

The text of the Capital Requirements Directive, if agreed by all three EU institutions, would make it compulsory for banks to adopt transitional plans to address ESG risks in the short, medium and long term in line with the EU objective of achieving climate neutrality by 2050.

The directive would also impose climate disclosure requirements on banks. It would likewise give the European Banking Authority a mandate to assess whether a dedicated prudential treatment of ESG risk exposures could be warranted.

Based on the findings of the EBA, the European Commission could decide to adopt a legislative proposal on the issue.

Econ failed, however, to adopt a “one-for-one” rule, which would force banks to match each euro of financing for new fossil fuel activities with one euro of capital reserves.

“MEPs from across political parties are caving to pressure from the banking lobby,” Julia Symon, head of research and advocacy at Brussels-based, non-profit group Finance Watch, told Sustainable Views.

“The prevailing narrative was that capital charges are punitive and that banks are already sufficiently capitalised, but the reality is they would protect EU citizens, not punish banks. EU banks with robust risk management frameworks would not even be impacted by a one-for-one rule.

“The banks effectively got a free card to continue financing fossil fuel expansion while claiming they are on track to net zero, which contradicts all available scientific evidence,” she added.

Climate vs crypto

The decision not to back the one-for-one rule was “especially shocking”, given that MEPs did agreed to introduce higher capital requirements for crypto assets, meaning banks will need to have enough of their own funds to cover losses that occur due to their crypto exposures, said Finance Watch in a statement.

Symon said that “in the absence of capital requirements fixed in the regulation [as would happen with the one-for-one rule], all other measures, no matter how ambitious they sound, are applied at the discretion of banks and the supervisors”.

“Given that assessments and measurements of climate risk are in their nascency, actual outcomes of applying those measures are questionable,” she added.

Finance Watch had spearheaded a campaign to put pressure on the Basel Committee on Banking Supervision, requesting the increase of capital that banks and insurance companies must hold against high-emitting assets that would oblige them to finance new fossil fuel activities solely from their own funds.

The BCBS is a Swiss-based forum for international co-operation on banking supervision, grouping 45 central banks and bank supervisors, including the European Central Bank, the US Federal Reserve and the Bank of England.

The European Parliament said it was now ready to start negotiations with the European Commission and the European Council on the directive to come to a final decision later this year.

EU fossil fuel finance so far

According to the Banking on Climate Chaos 2022 report, published by a group of non-profits including the Rainforest Action Network and BankTrack, the EU’s largest lenders have provided $643bn in loans and debt and equity underwriting to fossil fuel companies since the singing of the Paris Agreement. Overall, the report looked at the world’s biggest 60 banks; EU-based lenders’ fossil fuel financing represented less than 14 per cent of total.

The largest fossil fuel financier in the EU, BNP Paribas, is the 10th globally. The overall ranking is topped by JP Morgan. The report’s authors noted La Banque Postale’s public commitment to stop financing to companies expanding oil and gas activities and exit the sector by 2030. It also positively singed out coal exit policies by Crédit Agricole and Nordea.

BNP has also committed to exit coal, with a 2030 target to do so in OECD countries. Last week, the French bank also announced that it will reduce the amount of oustanding financing for oil companies to less than €1bn by 2030, down from the current €5bn.

Photo credit: RossHelen/Envato

A service from the Financial Times