Bank of Russia to introduce climate capital rules

The Bank of Russia (BoR) will adjust the capital requirements it places on banks based on the climate impact of the loans they issue, a top official has revealed.

First deputy governor Ksenia Yudaeva told Reuters that the BoR plans to ease capital requirements for banks that lend money to green projects, and raise them for those giving loans to firms that make insufficient climate disclosures.

The BoR is increasingly concerned about the risks to the country’s financial system presented by the worldwide energy transition. It recently warned of the knock-on effects of a permanent decline in the global demand for coal, oil and gas, which together account for roughly half of Russia’s exports.

With a shrinking market for Russian fossil fuels, and a growing number of global investors moving to green their portfolios, the BoR fears domestic banks will find themselves increasingly relied upon to support the country’s high-carbon sectors. This comes at a time when those firms require huge sums to fund their own decarbonisation plans.

Russia’s largest companies currently spend less than 1% of their revenues on sustainable projects, compared with more than 2% invested by their foreign peers, the BoR has said.

Alongside the changes to capital rules, the BoR is developing new green financing instruments, which it hopes will make it easier for firms to attract extra investment, including from overseas. These include climate-transition instruments as well as green project finance and green mortgages.

Yudaeva said adjusting banks’ capital requirements would be the first in a number of regulatory changes. The BoR has already announced plans to commence regular climate stress tests, and says it will develop further recommendations for financial firms on integrating climate risk considerations into their activities.

The Bank of England (BoE) and European Central Bank are also considering changes to their capital frameworks to account for climate-related risks, with the BoE hoping to introduce more guidance by the end of 2022. The BoR has yet to reveal when it will begin its new approach.

A group of academics, economists and civil society organisations recently wrote to the Basel Committee on Banking Supervision calling on it to introduce ‘one-for-one’ capital requirements for financial institutions supporting new fossil fuel projects, meaning they would have to do so using entirely their own funds.

The Basel standards provide the framework for much of global banking regulation, so such a move could see climate capital rules adopted much more widely.