Banks can contribute to the climate transition
News, Economic Commentaries The banks have the opportunity to contribute to the green transition by steering their lending towards projects that favour sustainability. But a sufficient level of transparency is required to be able to follow the progress of banks' climate work. An Economic Commentary examines different methods to evaluate how green a bank is.
Green finance includes loans, investments and other services that target sustainable projects. For example, lending to certain types of housing can lead to greater energy efficiency and renovations that provide us with energy-efficient buildings that reduce the need for fossil fuels. At the same time, it can be risky for banks to lend against collateral in the form of buildings that are at risk of flooding and other climate impacts.
In an Economic Commentary, author Niklas Frykström looks at different ways to evaluate how green a bank is. In particular, he describes the Green Asset Ratio (GAR), which measures the share of green assets.
The GAR reporting published by large listed banks shows that only a very limited part of the banks' balance sheet is green, according to the EU taxonomy. The latter defines which economic activities are considered environmentally sustainable. GAR is likely to increase as more companies start reporting sustainability data that can be included in the metric.
A voluntary measure that banks should supplement this with is the Banking Book Taxonomy Alignment Ratio (BTAR), which provides a broader picture of their green engagement. Investors and clients can also look at other metrics, such as banks' lending to high-carbon emitting industries.
Author: Niklas Frykström, who works at the Financial Stability Department.
Economic Commentaries
Economic Commentaries are brief analyses of issues with relevance for the Riksbank. They may be written by individual members of the Executive Board or by Riksbank staff. Staff commentaries are approved by the relevant head of department, while Executive Board members are themselves responsible for the content of the commentaries they write.