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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....
more at Bloomberg