Abstract
The need for a quick and radical green transition gives a key role to the financial system as the main source to fund the change. This debate also involves the development of banking regulation tools able to serve the transition. Building on previous works, we propose a method to weight banks’ assets that combines conventional financial risks and environmental risks to calculate prudential capital requirements, and we apply it to the EU Taxonomy’s technical screening criteria to build an environmental risk indicator based on the buildings’ energy consumptions. We show how to calculate the tool endogenously for the taxonomy sections related to buildings (new construction, purchase of building, renovation), thus proving its immediate enforceability, using data from the Lombardy’s housing stocks. Finally, we conduct a stress test for the Italian banking system showing that our proposal would be an effective incentive for the banks to fund the green transition of the construction sector. Disclaimer: The views expressed are those of the authors and do not involve the responsibility of the Bank of Italy or RSE.
Highlights
The EU and the TransitionThis paper deals with the sustainable finance in the building–real estate sector, focusing on green mortgages, and deepens how banking regulation can contribute to the green transition by applying prudential rules that combine the rigorous criteria required by the European Union (EU) Taxonomy with environmental risk assessment methods, based on the life cycle analysis approach (LCA).In recent years, and since the 2015 Paris Agreement, we have seen a significant change in the perception, both at a mass level and in the financial system, of the importance of the issue of climate change and green finance
The boundaries of the analysis are the air emissions related to the extraction, production, distribution and combustion processes of the two energy vectors needed to provide the energy services accounted in the Energy Performance Certificate (EPC) of our sample of residential buildings: natural gas and electricity
Classes from B to G are not compliant; we propose to assign the neutral value of ERWA (1.0) to the B class, in order to provide a premium to the Taxonomy compliant classes (A4-A1) and a penalty to the less energy efficient classes (C-G)
Summary
Since the 2015 Paris Agreement, we have seen a significant change in the perception, both at a mass level and in the financial system, of the importance of the issue of climate change and green finance. The experience of the COVID-19 pandemic confirmed the importance of creating a regulatory framework that favours the mobilization of financial resources towards a quick transition. To be effective, this framework should include many issues, such as standardization of information on environmental disclosure, the development of new financial products (green bonds, green loans, etc.) and tools to ensure financial stability. The EU promoted a financial policy to support the environmental transition needed by the Paris Agreement, in particular with the European Commission Action Plan on financing sustainable growth
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