Extending ‘environment-risk weighted assets’: EU taxonomy and banking supervision

Abstract

Changing the economy to meet the goals posed by the Paris Agreement implies a financial system aligned to this end. This debate also involves a reconsideration of aims and tools of banking regulation although, for now, the discussion is still not very operational. In a previous work we introduced the ‘environment-risk weighted assets’ to internalize the pollution risk of the borrower that here we expand empirically to calculate the ‘external costs footprint’ of Italian corporate lending and to cover virtually every part of banks’ business. Moreover, we analyse whether our proposal is aligned to the European Union taxonomy on environmentally sustainable activities. We show that our framework can help to put on a working track the discussion on banking regulation for sustainable finance.