Originally published in Dutch daily Het Financieele Dagblad on 16 January. Original text: click here.

Green finance: Encouraging green loans is a sensible idea

European banks favour a robust financial sector with strong capital buffers that are properly aligned with the risks that banks have to deal with. This also includes risks relating to climate change and environmental investments.

A ‘punishing factor’ for loans to ‘brown’ companies – as discussed by Arnout Boot and Dirk Schoenmaker in their in their article for Dutch daily Het Financieele Dagblad on 9 January and their blog post on Bruegel.org of 16 January on –  is not necessary. Such a factor could negatively impact adequate risk management. Globally speaking there is no clarity about the definition of ‘brown’, while there is a lack of reliable data on the way that ‘brown’ companies affect the climate.

The European Commission and the European Parliament are considering a ‘green supporting factor’. This is a sensible idea. Such a factor would mean that banks commit less capital for loans that effectively contribute to accelerating the transition to a sustainable, climate-neutral economy. It would offer better chances to future winners.

The introduction of a green supporting factor however should not contribute to unbalancing risks in the financial system. As is the case with other measures, a green supporting factor should be a measure that realistically reflects the real risks for such loans.

It is extraordinarily difficult to create proper definitions that are not at odds with the need for accuracy and purity in risk weights. The banking sector nevertheless is already embracing various initiatives to promote sustainability and the energy transition. This discussion and reflection still is ongoing. The recommendations – expected later this month – of the European Commission’s High-Level Expert Group for Sustainable Finance, will play an important role.

Wim Mijs is Chief Executive Officer of the European Banking Federation