In an open letter signed by more than 60 organisations, Finance Watch and partners called on the G20 leaders to recognise fossil fuel exposures of banks as ‘higher risk assets’ under the Basel capital framework, the internationally agreed-upon principles of banking regulation.
The letter signed by more than 60 organisations and dozens of prominent economists urges G20 leaders to define ambitious actions to ensure safe transition for the financial system by addressing the risks related to fossil fuel exposures at the G20 meeting in Bali.
Climate change is causing enormous damage including environmental degradation, biodiversity loss, food insecurity, conflicts, mass displacement and migration. This has an increasingly destabilising impact on our economies and financial system. The longer we postpone mitigation and adaptation actions, the higher the chances are that we will also face financial crises induced by the climate crisis – either due to extreme weather events disrupting the economy or due to an abrupt and disorderly transition. The climate crisis is creating a feedback loop where financial institutions are financing activities that are accelerating irreversible climate change. This in turn increases their exposure to climate-induced financial crises.
When this happens, someone will have to pay the cost. World leaders can set the agenda to decide whether the size is manageable or overwhelming. As it stands, this cost looks like it will fall on public budgets and taxpayers, as the financial sector has not started to build up adequate capital buffers to absorb upcoming losses.
To correct this, fossil fuel exposures should be recognised as higher risk assets under the Basel framework. Doing this at the 60 largest global banks would only require an estimated USD 183.5 billion in additional capital. This is equivalent to around three to five months of banks’ 2021 net income – a feasible and important step in preventing a snowball build-up of risk. The current practice of not treating banks’ fossil fuel exposures as higher risk is effectively a subsidy to the fossil fuel industry, which we estimate is worth around USD 18 billion a year.
This measure would increase banks’ capital requirements for fossil fuel lending and pave the way for the financial system to support the renewable energy transition. It is a very achievable solution to secure global financial and climate stability.
As time is of the essence, the level of ambition and urgency to address climate-related financial stability risk need to move up a gear. The global community needs the leaders of the biggest economies of the world to provide the political direction to regulators, supervisors and policymakers to take precautionary action before it is too late.