Include Mandatory Banking Transition Plans Within Pillar 2

This paper by the Institute for Climate Economics makes the case for climate transition plans to be fully integrated into prudential regulation for banks in the EU. It says a requirement for banks to publish transition plans – along with effective supervisory oversight of their implementation – is necessary in order to promote a smooth and timely transition.

The report makes a number of recommendations as to what banks should be required to include in the plans:

• a long-term goal of carbon neutrality by 2050, and five-yearly interim targets that do not defer decarbonisation to the end of the period;
• decarbonisation trajectories for each sector in banks’ portfolios, based on national and European plans;
• minimal use of carbon offsetting.

In the event that banks’ plans do not meet the required standard, or banks fail to stick to the targets they have set themselves, the report suggests that supervisors should be able to require changes in governance, risk management practices, concentration limits and capital requirements.

The paper states in detail how specific transition plan requirements could be legislated for via amendments to the 2021 package of EU banking reforms.