Finance Watch, the pan-European NGO dedicated to making finance serve society, has today sent an open letter to policymakers outlining the urgent need to upgrade the Solvency II Directive, the Capital Requirements Regulation and the Capital Requirements Directive to address climate-related financial risks.
The letter calls for mandatory sustainability targets and governance structures backed by credible and robust transition plans. It highlights how supervised stewardship and engagement through transition planning can help financial institutions reduce exposure to stranded assets. In other words, it would allow them to manage their micro-prudential transition risks on the road to sustainability and by extension, mitigate the systemic risk of disruption from unabated climate change. Finance Watch and its coalition partners argue that EU prudential regulation should be internally coherent when addressing climate-related risk. In short, Pillar 1 provisions, such as capital requirements, must reflect climate-related financial risks. Co-signing NGOs also warn that if banks and insurers don’t properly account for climate-related risk, a climate-related financial crisis and future bail-outs using public money are a real possibility.
Julia Symon, Head of Research and Advocacy at Finance Watch, said:
“The review of these key pieces of the EU prudential regulatory framework is a chance to ensure that financial institutions are a key part of the sustainable transition, rather than a roadblock to progress. Over the past year, we have seen a proliferation of voluntary transition commitments that differ widely in terms of the definitions and standards applied. But there is little evidence of effective action based on these commitments. Clearly, mandatory requirements on transition plans, subject to supervision, are needed”.
On 9 June 2022, the European Parliament Economic and Monetary Affairs (ECON) Committee published its draft report on the review of the Solvency II Directive. It scrapped proposals by the European Commission to address climate-related financial risks. The ECON Committee report on the review of the Banking package has a higher level of ambition, yet, it stops short of addressing the climate-related financial risks holistically. The members of the European Parliament ECON Committee have until 12 July to table amendments to the Solvency II and CRR/CRD legislative texts. The open letter urges policymakers to adequately address climate-related risk at this important moment in the legislative process.
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Notes to Editors
The open letter is available on the Finance Watch website. It follows a landmark report by Finance Watch Chief Economist, Thierry Philipponnat, on the contribution of the financial sector to decarbonizing the real economy. While two separate debates, navigating climate prudential risks and achieving net-zero both require a policy response built on the idea of double materiality. The letter also reflects the core arguments set forth in Breaking the climate-finance doom loop, another Finance Watch report by Thierry Philipponnat published in 2020 which was further developed in a later report, A ‘silver bullet’ against Green Swans – Incorporating climate risk into prudential rules. Finance Watch has also raised the need to address climate-related financial risk in the insurance sector in its report, Insuring the uninsurable, and at the ECON Committee hearing on the review of Solvency II. Finance Watch called for a faithful implementation of the Basel III framework and to adapt it to take into account climate change related risk at Pillar 1 level at the ECON Hearing on the Basel III “Finalisation Package” on 31st March 2022.
