Publications

The proposal for mandatory climate transition plans for banks is slowly making its way through the regulatory debate. Proposed by the European Commission and confirmed by the EU Council, this proposal has now also been taken up by the European Parliament. This obligation could be a game-changer for financial risk management and the alignment of financial flows with the transition to a low-carbon economy. It could lead banks to limit their activities in climate-damaging activities, adjust their business models, review their strategies as well as their governance and risk management procedures.

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 from the Institute for Climate Economics (I4CE), explains in this blog which parameters will be decisive for framing the ambition of this legislative proposal.

Private finance will not fund the transition without a stronger commitment from public authorities. For several years, and particularly since COP 26, considerable time and attention has been dedicated to the subject of voluntary commitments from private financial actors. These commitments, made within the framework of international initiatives, should in principle enable private finance to be mobilized for the transition to a carbon neutral economy.

One year ago the creation of the Glasgow Finance Alliance for Net Zero - GFANZ – was announced. The expectations were as big as the numbers: a coalition gathering 500 financial actors representing 130 trillion dollars. Private financial actors were finally stepping in and mobilizing. But one year later, the coalition raises many doubts. On one side it faces criticism from NGOs, and on the other some US actors are considering leaving the coalition under the pressure of members of Republicans Party.  

The European Union has made rapid progress on the issue of transition plans for companies and banks. First of all, the CSRD directive obliges each listed company to publish its plan for achieving carbon neutrality by 2050. Published by EFRAG this summer, the standards set for these plans can be considered ambitious and commensurate with the challenges they face. With regards to banks, it is now clear that they will be required to publish their transition plan. What remains under debate is whether these transition plans should be integrated into prudential regulations, which would open the way to numerous possibilities of action and sanctions by supervisors.

The end of the year is always a busy period for the climate finance world, with international events multiplying to take stock of the latest achievements in the implementation of the Paris agreement and to identify the next – more ambitious – steps to be taken by the international community. Though the climax of these events is undoubtedly the COP (starting in two weeks in Sharm El Sheikh, Egypt), with the New York Climate Week, and the World Bank and IMF’s international meetings behind us, and the Finance in Common summit coming to an end, we start sensing that some topics are already drawing a lot of attention.

The restructuring of the economy towards a low-carbon system will lead to develop activities that are aligned with the needs of a net zero economy, to restructure others in order to make them compatible with these needs and to stop harmful activities. The financial sector needs to anticipate these dynamics to address strategic risks and […]

The transition plans aim to establish a progressive decarbonisation strategy by 2050, in line with the European Union’s objectives. The European Central Bank, through Frank Elderson, as well as several NGOs are calling for transition plans to be made mandatory for banks and to be integrated into prudential regulation. This note first looks at why […]

The Basel Committee is finally taking up climate issues! Founded in 1974, this forum which brings together the financial supervisors of the G20 countries and which provides the main guidelines for guaranteeing financial stability has been absent from climate issues since Donald Trump's mandate. It recently published a first consultative document on the principles of climate risk management and supervision. Julie Evain presents the recommendations addressed by I4CE to the Basel Committee.

As the main financier of the French and European economies, banks play a key role in financing the transition. Their current contribution in France is in the order of 8 billion euros per year, but this will need to more than double according to estimates by I4CE. To accelerate this shift for banking institutions and to prevent their increasing exposures to climate risks, the debate has tended to revolve around whether or not there is a need to reform prudential requirements.

Since 2018, and under the initiative of the NGFS, the network of central banks and supervisors for greening the financial system, several central banks and supervisors have begun to conduct their first climate stress test exercises to determine the vulnerability of financial institutions to climate-related risks. In order to help central banks to carry out this type of exercise, the NGFS published in 2020, its first guide to climate scenarios analysis that can be used in climate stress tests.

The government has recently modified the environmental, social and governance disclosure obligations for French investors via the publication of an implementing decree which specifies regulator expectations. Romain Hubert of the Institute for Climate Economics explains why this decree was to be expected and necessary for climate reporting.

In 2015, France pioneered requirements for climate-related disclosure from financial institutions, asking them to explain their strategy for integrating climate-related risks and for contributing to the achievement of the Paris Agreement objectives and the French national low-carbon strategy. Three years of implementation yielded mixed results and requirements are in the course of being updated in […]

Some of the heat waves and wildfires that were experienced in Europe and in the world in the summer of 2019 are symptoms of a climate that is already changing. These events may cause losses for banks and other financial institutions, which will therefore have to integrate climate change into their decisions. Regulators are also pushing in this direction.

In recent years, financial regulators have encouraged financial actors to take account of “climate risks” in order to ensure both financial stability and the efficient functioning of markets, the two traditional objectives of regulation. This risk-based approach is an important first step, but will it be enough to deliver on climate objectives?

In recent years, financial regulators have encouraged financial actors to take account of “climate risks” in order to ensure both financial stability and the efficient functioning of markets, the two traditional objectives of regulation. This risk-based approach is an important first step, but will it be enough to deliver on climate objectives?

The public institutions that regulate and supervise private finance will talk a lot about climate change in the coming months. The European taxonomy that allows economic actors to identify activities that are favorable to ecological transition or the "climate stress tests" of the Banque de France and ACPR are just some of the issues they will have to deal with and that we invite you to follow. I4CE has synthesized for you the "climate calendar" of financial regulation in a graphics.

To accelerate and deepen this work, the new European Commission will adopt a renewed Sustainable Finance Strategy.  As the public consultation to define the future directions of this strategy draws to a close, Julie Evain from I4CE points out three challenges to be met in order to integrate climate issues into the financial sector.

The pandemic caused by Covid 19 has triggered a major economic crisis. The emergency treatment of this crisis relied heavily on massive recourse to fiscal and monetary instruments already widely used during the 2008 crisis. But financial regulation was also mobilized to ease or alleviate prudential constraints in order to preserve bank financing for economic players, especially those most affected by the crisis. This illustrates the different facets of the use of financial regulation: primarily intended to ensure the efficient functioning of financial markets and financial stability, it can also be used with economic policy objectives.

States and more generally public authorities will not finance the transition to a low-carbon and climate-resilient economy on their own. Private financial actors have a key role to play and, over the past decades, they have taken numerous initiatives to promote "responsible investment" and "sustainable finance". However, the impact of these initiatives is far from commensurate with the climate challenge, , and financial regulation must play a role. This I4CE study analyses the different objectives that regulators can pursue to help the financial sector respond to the climate urgency, and provides an overview of the instruments at their disposal. It also highlights the challenges of implementing these instruments and identifies those that need to be used in the short term and those that need more time to be implemented.