Addressing the climate–finance interaction in a new light: From green to brown assets disclosure in the banking industry

Abstract

AbstractThis paper explores the contribution of the banking industry to the decarbonization of the economy in the aftermath of the Paris Agreement. To this end, two complementary indicators are proposed: a carbon balance and a fossil fuel to equity ratio. The main novelty of these indicators is that, beyond traditional approaches in green finance, they take into account the parallel endeavor of banks in fossil fuel financing (so‐called “brown assets”). The results of the inquiry are presented in various maps and graphs. Both elements show that the bank‐induced process of decarbonization is lagging behind that of other industries, which creates a significant risk of financial instability. Changing this banking behavior necessarily involves a climate‐driven reform of the prudential rules on capital requirements; however, given the magnitude of the problem, this might not be enough. Nor is it the most urgent concern. Above all, what this paper makes clear is that the appropriate measurement and disclosure of financed emissions (both “green” and “brown”) is the first crucial step for the correct assessment of climate‐related risk and forms the basis for subsequent policy action.