Failing to plan is planning to fail: Prudential transition plans and European Banking Authority consultation
After nearly 4 years of negotiations, the European Union has just reached an agreement to reform the Capital Requirements Directive (CRD) for banks. The inclusion of climate change is a major step forward: banks will have to draw up prudential transition plans, supervised by the European Central Bank. These plans will complement the European regulatory architecture that is being put in place for large companies, with the Sustainability Reporting Directive (CSRD) and the Due Diligences Directive (CSDD). Are these banking transition plans a sufficient breakthrough to finally commit banks to climate neutrality? The answer to this question will depend on the implementation of EU legislation.
The European Banking Authority is at the helm of the EU banking system, and it must determine the precision of the “passage plan”. Indeed, it must provide a precise definition of these transition plans and their scope. The Authority has just submitted its draft guidelines for consultation. In this document, the European Banking Authority takes a narrow view of the prudential transition plan: an instrument for risk management alone, with no real strategy for organising the financing of the transition. But these are two sides of the same coin. Participating in the reorientation of banks’ activities means avoiding a disorderly and delayed transition, which would only increase the physical and transition risks. Faced with the rough seas of the international economy, EU banks need a navigation map to safely sail towards the harbour of this climate neutrality, and not just provide details on the obstacles along the way.
The document also takes up previous recommendations made by I4CE, on the sector coverage, time horizons, banks’ portfolios and variable remunerations. These elements should be retained during the consultation. It is now up to national supervisors, banking federations, think-tanks and NGOs to respond to this consultation before the European Banking Authority publishes its final document, expected by the end of 2024. This stage will be decisive to deliver guidelines that are fit for banks’ transformations. Indeed, mapping the way forward is key to ensure safe journey that takes to the desired destination. Failing to plan, would be planning to fail.