This year, the European Union (EU) will implement the revised international rules for banking, known as ‘Basel III’, into EU legislation. Friends of the Earth Europe), BankTrack), CRBM) and the Berne Declaration) call upon the European Commission to include sustainability criteria in the new law – to ensure banks integrate sustainability criteria in their lending, financing and investment decision making processes. It would encourage them to reconsider unsustainable and dangerous investments and to invest in more responsible and sustainable businesses – such as renewable energy producers and social entrepreneurs.
Banks using the internal rating based approaches should differentiate risk weighting factors for various categories of borrowers according to their level of sustainability. As sustainable borrowers have a lower probability of default, their risk weighting factor should be lower. Non-sustainable categories with a higher probability of default should have higher risk weighting factors. Banks using the standardised approach should only use credit rating agencies that integrate sustainability criteria in the credit rating process and in determining risk weighting factors. As this proposal would not affect the overall capital reserve level, it would advantage banks focussing primarily on sustainable borrowers.
Specific and penal capital requirements should be considered for banks providing credit to companies grossly violating environmental and human rights standards, as well as for banks financing other investors that invest in such companies, such as private equity funds.
Source: Friends of the Earth Europe, Sustainable Finance campaign)
Report: Why to integrate sustainability criteria in banking regulation? (March 2011))
Report: How to integrate sustainability criteria in banking regulation? (March 2011))