Finance Watch Pushes EU to Toughen Climate Finance Rules

Julija A. Image
ByJulija A.
May 11,2021

Finance Watch, an initiative for improving the impact of the financial world on society, urged the European Commission to strictly regulate banks and insurers dealing with climate-related endeavors. The group is lobbying for a 150% risk weight for investments in companies whose activities damage the environment.

The so-called “climate-finance doom-loop” implies that “the longer the EU waits, the higher the chances that it will face a financial crisis induced by the climate crisis.” The proposed solution would force banks to hold as much as three times the amount they usually would to cover the risks involved with the fossil-fuel business, such as financing new refineries or mines.

The EU is in an unenviable position at the moment: It’s already in the process of reviewing its policies for lenders and insurers, but also needs their support for the pandemic recovery effort. Banks provided loans and lines of credit to small businesses across Europe, and they will have an even more vital role after the pandemic - the reallocation of resources.

However, the growth in eCommerce and virtual communication services made for excellent investment opportunities for banks, which will, in all likelihood, continue to be profitable after the pandemic. This skyrocketing of profits created room to raise the risk assessments and allocate more insurance funds for companies traditionally considered to be low-risk.

In the eyes of the banks, climate-endangering businesses are currently no different from other corporate financings. Companies in the fossil-fuel industry often have good credit standing, with risk ratings under 50%. That percentage doesn’t nearly cover the financial damage if and when the activities of those companies take a downward turn, especially since climate events are a substantial uncontrollable factor in their operations.

This is why the Finance Watch is pushing for the EU to modify its current rules on the topic. If the EU enforced a 150%-risk rule for banks investing in environmentally impactful enterprises, it would bring such investments to the same level as private-equity and other high-risk investments.

Finance Watch is supported by its members, public donations, philanthropic foundations, and the EU itself.

About the author

Julia A. is a writer at SmallBizGenius.net. With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.

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