Banks as political actors
October last year I attended the Vienna Banking Summit gathering on a Reality Check of Green Transformation & ESG Roadmap. The opening key note was this year held by neither the Austrian minister of Economy, nor by the Finance minister, but by the minister of Climate Action & Environment, indicating already the dimension of changing priorities for the systemically important banking sector. The Austrian government has launched an initiative called Green Finance Alliance aiming at financial institutions to pioneer the transformation of their business models in compliance with the Paris Agreement.
From all the speeches, panel discussions and executive talks I obtained an overview on these current important topics from different perspectives: political, regulatory, financial and of course the one of the banking sector in particular.
The main take aways for me were not as new as they were broadly confirmed through a general consensus:
The major factor with a leading impact on all of us is the time pressure induced by the emerging climate crisis.
The society and economy are on the verge of the biggest structural break since the industrial revolution.
The decisions and actions taken now will have long term impact (irreversible) on future generations and their well-being.
Politicians, supervisors and banks (including their customers) generally agree on the common goal, however there is still no common understanding on the roles every actor has to play in order to achieve this goal.
A more clear big picture is needed to be agreed on with all the parties speaking the same language.
The first step into this direction has already been made through the introduction of the European Taxonomy.
The EU Taxonomy
The main challenges for implementing the Taxonomy remain again the time pressure, the missing knowledge and data, as well as the complexity in terms of classification of activities into green/non-green in addition to the high volume of the regulatory material to process. One of the crucial aspects is the introduction of the Do Not Significantly Harm (DNSH) criterion, which adds a new perspective on evaluation of business activities away from the solely entity-view (i.e. a company as a whole). The further development of the EU taxonomy is expected to have an even bigger impact on the real economy and the financial markets In the future.
The role of the banks
The politics has clear demands on banks to play a crucial role in achieving the EU Green Deal objectives of climate neutrality by 2040. They are expected to provide the financial resources to the real economy in compliance with the Paris Agreement. In this sense the banks are stepping into the area of policy implementation and are pressed up between the regulators and the market (i.e. “sandwich position”). Their essential responsibility lies in selection and allocation of financial flows by taking long term decisions and associated risks now, thus contributing to transparency along the learning curve of doing politics. This involves courageous measures, characterised by both pragmatism and common sense.
The role of the supervisors
Since the financial markets are of systemic importance they need certain regulations and playing rules. The main purpose of the supervisors is to sustain financial markets stability during the transformation process. They seek to reduce the uncertainty and risks to a minimum by overcoming the silos in the big picture mentioned above, which means also to employ a transaction- rather than entity-based supervisory approach. The level playing field for both, non-financial and financial companies should be assured, and more diversified view is needed (e.g. regarding proportionality and tailored-made solutions). The uncertainty right now is regarding how much regulation is needed in order to allow for a market-driven transformation, because this is of a strategic importance and relates to new orientation of business models. Therefore, supervisors are currently not prescribing strict obligatory requirements, but rather are supporting banks within a structural dialogue with senior management. They are working on both, developing a climate stress test framework and new indicators such as the Green Asset Ratio (GAR) and thus introducing methodological standards. The GAR is expected to become one of the leading indicators for banks also as a competitive factor.
However, despite of a broad acceptance and readiness by banks to respond adequately, a major concern is to not be overwhelmed by resource-intensive data mining exercises and/or lose perspective in numbers and templates. Banks also expect that regulators will set more incentives directly to the real economy that will trigger green transformation and stop investments in non-ESG assets, i.e. the whole burden of implementing the policies will not be carried by the financial sector. The current lack of demand for green financial products cannot be overcome solely by the supply side. The future of green finance should be also customer driven to be able to absorb the excess liquidity on the financial markets through the financial intermediaries.
All in all, a close collaboration between supervisors, banks and customers is needed to find a straight direction, because a side step now will become very costly later. The green transformation should work for all the actors and be ideology-free. The holistic approach employed by the politics is therefore to allow for an investment programme, which is implemented through new technologies, educated labor force and enabled funding.
