OP-ED – Climate transition plans for banks: European legislators on a razor’s edge
The legislators in Europe are discussing the introduction of mandatory climate transition plans for banks. After the European Commission and the Council, the European parliament has adopted its position. Now trilogue negotiations between the three will begin. While all three seem to agree on the idea itself, differences remain in how these plans are defined. Anuschka Hilke, Director of the Finance program, explains in this blog which parameters will be decisive for framing the ambition of this legislative proposal.
The proposal for mandatory climate transition plans for banks is slowly making its way through the regulatory debate.
The European Parliament has adopted its final position on the Banking package. The package consists of a revision to the Capital Requirements Directive and Regulation and Solvency II rules. This is done in order to implement the Basel III international framework which has the objective of increasing the resilience of the banking sector to future financial crises. Yet, another important requirement has been included to address climate change.
The text obliges banks to adopt climate transition plans as part of a broader ambition to better manage environmental, social and governance (ESG) risks. This new obligation has been proposed by the Commission and is confirmed in the positions of the European Parliament and Council. I4CE has supported the discussions on climate transition plans for banks through dedicated research for more than a year now.
It remains to be seen if this becomes a significant leap forward or just another side step
Mandatory climate transition plans for banks have the potential to become a game changer for financial risk management as well as for aligning financial flows with the transition to a low-carbon economy. Banks could potentially be required to restricting or limiting their business with regard to carbon intensive activities, adjusting their business models, governance structures and risk management procedures, or revising their strategies.
However, while there is a consensus at this stage on the principle of making climate transition plans for banks mandatory, the exact formulations differ in ambition and clarity. In order to develop their game changing potential, three key parameters need to be clarified in the final version that remains to be negotiated.