EU urged to bring in tougher climate finance rules
European Union policymakers today faced a call to break a ‘climate-finance doom loop’ by making banks hold up to three times more capital to cover risks from fossil fuel activities.
Finance Watch, which campaigns to improve how finance works for society, has written to EU President Ursula von der Leyen, urging the union to toughen capital rules for banks and insurers involved in environmentally damaging activities.
“The longer the European Union waits, the higher the chances mount that it will face a financial crisis induced by the climate crisis,” Finance Watch said in the letter.
The lobby group, set up after taxpayers bailed out banks in the 2008 financial crisis, is supported by charitable foundations and public donations.
The EU is reviewing its capital rules for banks and insurers. Finance Watch has suggested changes that would force them to hold more capital to cover polluting activities, such as financing new mines or refineries.
It is unclear how much the EU would take on board from the recommendations, as it needs banks to help the bloc recover from the pandemic.
Under current bank rules, financing fossil fuel activities carries the same risk as other types of corporate financing.
As many oil and gas firms have high credit ratings, the risk weighting for them can be as low as 20 per cent.
The risk of such activities becoming worth far less due to climate-related events is not factored into bank capital rules sufficiently, the letter said.
“To rectify this, a risk weight of 150 per cent should be applied to existing fossil fuel exposures,” it added.
Read more: UK banks provided over $50bn in financing for coal-exposed firms from 2018 to 2020