The EU’s 2021 Banking Package has climate wrapping paper - but is the box empty?

By Vasilka Lalevska, CSLN Policy Director, April 2022

On March 31st, 2022 the European Parliament´s Committee on Economic and Monetary Affairs (ECON) organized a public hearing with key stakeholders to help inform its position on the European Commission´s Banking Package 2021. These discussions continued on April 20th when the Parliamentarians gathered for the first exchange of views in the Committee, ahead of the (usually) long process of finalizing the Parliament´s position.

Why is this important for the green transition efforts? We break it down for you.

Firstly, what is the Banking Package 2021 and what does it mean for climate?   

The Package, adopted by the Commission in late October 2021, includes amended versions of the Capital Requirements Regulation and Capital Requirements Directive (and another proposal concerning resolution, but that is a separate discussion). These two amended versions promise to do three things: 1) finalize the implementation of the Basel III agreement, considering EU banking sector specificities; 2) give more powers to supervisors in certain areas; and 3) contribute to the green transition.   

Ever since its adoption, the Package has gathered a lot of mixed reactions, all questioning whether the proposal is living up to its promises – either by not doing enough, through missing the opportunity to address the prudential treatment of climate risk, or doing too much, by giving in to a mis- analysed impact on banks that will negatively affect banks´ support to the real economy and green investments.  

So, is there a missed opportunity?  

The short answer is yes, specifically in addressing risks related to climate change. During the Hearing, which invited experts from the supervisory authorities, financial sector, NGOs and academia, two out of the four experts (the latter two) highlighted that the proposal does not address bank´s exposures to fossil fuel assets and the risks they incur.  

To rightfully do so, measures should be introduced at the Pillar 1 level of the Capital Requirements Regulation (CRR), which will change the current framework for capital. Yes, the proposal now obliges banks to identify, disclose and manage ESG risks, but relying on disclosures and scenario analysis will not be enough to safeguard financial stability. This predicament can be perhaps best reflected in the commentary from one of the participants - is the EU too naïve in its approach forward?  

What can the European Parliament do and what is next?  

As the looming reality of climate change and its (irreversible) impact unfolds, central banks and legislators are prompting the debate on different capital treatment of green/polluting assets, with a recent example coming from Canada. This resonates with the Climate Safe Lending Network´s proposals highlighted in the  Financial Stability in a Planetary Emergency report and in our submission to the open consultation on climate-related financial risks by the Basel Committee.  

The European Parliament can use its powers, as it has times before, to change the narrative on climate-related risks and capital requirements. That would show the Parliament following through on its own declaration of climate emergency and demand for policy proposals to be aligned with the Paris Agreement target of 1.5°C. It will also open the debate on ESG risks and capital, in general, as climate change is imminent, but not the only sustainability-related risk that needs considering in this framework.  

For now, let´s mark June 13th in our calendars, when the ECON Committee is set to release its first written thoughts on this proposal. It will be one of the must-reads for this summer for all of us engaged in the green transition. 

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