Climate Rules: Europe Is Slowing Down

The banking system represents a fundamental transmission mechanism for the success of the fight against global warming in the European Union. Credit institutions are required to measure and make public their financing to the sectors most responsible for the production of greenhouse gases, such as steel or energy, gradually enabling them to convert to less carbon-intensive technologies. In this way, banks act in the public interest and, by helping their debtors plan the ecological transition in advance, they protect them from climate risk and a rude awakening that would leave bankruptcies and losses in its wake.

Since 2022, with increasing insistence, the ECB has asked large credit institutions to measure (or at least estimate) the impact the loans they provide have on global warming, equipping themselves with risk indicators and monitoring them so that company boards can encourage the progressive shift towards more sustainable investments. Since 2023, the European Banking Authority has introduced mandatory reporting according to which major financial institutions must inform the public on the outcomes of these attempts and expected trajectories until 2050 (when net greenhouse gas emissions should be completely eliminated).

For this effort to be successful, it is important not to leave all the burden of the climate transition on the credit system, which should be shouldered first of all by the public sector. Let's think for example of housing mortgages: given that a large part of greenhouse gases is emitted by heating systems, incentives are needed that allow owners to make improvements aimed at saving energy and avoiding the use of particularly polluting sources.

As part of this virtuous collaboration between the public and private sectors, the European Union has introduced two important measures: the CSRD (Corporate Sustainability Reporting Directive) and the CSDDD (Corporate Sustainability Due Diligence Directive). The former requires a growing number of companies to report their environmental, social and governance impacts in a detailed and transparent manner; the latter requires large companies to identify, prevent and mitigate negative impacts on human rights and the environment for their suppliers and customers. With the progressive entry into force of these rules, expected in the coming years, banks would receive an increasing volume of homogeneous, standardized and generally reliable data to know the actual carbon emissions caused by financed activities.

However, last February the European Commission asked Parliament and the Council to put these measures on hold in order to significantly soften them, reducing the number of entities which are required to report by over 80% and, to an even greater extent, the volume of data requested. This abrupt U-turn, called the “Omnibus Package,” was justified by the mantra of competitiveness, also in light of the very permissive attitude of the Trump administration in the United States in terms of emissions.

This is caricatural and unfortunate. The first requirement for being competitive is to stay alive and, if banks are not provided with the information needed to understand and mitigate the climate risks of companies they lend to, it will be like forcing them to drive in the fog on a road full of potholes. Saying that rules suffocate the market is like saying that water drowns fish: when Silicon Valley Bank blew up in 2023 because its risks were not adequately monitored, we thanked heaven that European banks were subject to more stringent scrutiny. Before the ink has even dried on that story, once again they would have us believe that rules and transparency are just a useless hindrance.