Keeping derivatives out of “green asset ratio” calculations may just encourage lenders to use more of them on climate-unfriendly financing deals.
The many rules, metrics and disclosure requirements imposed on banks
after the global financial crisis largely succeeded in their principal
goal: making lenders safer. But a new gauge that aims to encourage
lenders to do more good — by fighting climate change — may just inspire a
renewed fascination with derivatives, one of the raciest parts of
finance.
From
as early as next year, European banks may be asked to calculate the
“greenness” of their activities, or what share of their business is
financing climate-friendly activities. The European Commission is
drafting the final rules.
The so-called green asset ratio (GAR) measure is
meant to help inform stakeholders — including investors, employees and
depositors — of a bank’s commitment to disinvesting from fossil fuels by
revealing what proportion of its assets are environmentally sound.
Depending on its relative shade of green, a lender’s funding costs could
be at stake, as well as its ability to retain talent and its
attractiveness to customers. Unlike banks’ other complex financial
metrics, a green label may resonate with a much broader public that’s
increasingly conscious of companies’ role in society.
European banks’ lending practices are critical to
the region’s efforts in curbing polluting businesses. Companies in the
region tend to rely on bank loans far more than in other places. The
total balance sheet of European Union lenders was about 200% of the
bloc’s gross domestic product at the end of 2018. In the U.S. that
metric has been closer to 80% over the past 15 years....
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