‘Green Supporting Factor’ under fresh fire from European legislators

More criticism raises doubt about the likelihood of the proposal being accepted by EU

The EU’s plans for a ‘Green Supporting Factor’ (GSF) have come under further fire from legislators and politicians, fuelling doubts that the proposal will make it into regulation.
The GSF is the name for the process of loosening capital requirements for banks that lend to eligible green projects in order to stimulate the flows of private capital into climate mitigation and resilience projects. It was named by the European Commission as a top priority within its sustainable finance agenda.
However, even the Green Party has come out against the proposal. At a recent meeting convened by the European Parliament’s Economic and Monetary Affairs Committee, to discuss sustainable finance, Green MEPs Sven Giegold and Molly Scott Cato (the ‘rapporteur’ for the committee’s own report on sustainability) questioned the concept.

“There should be no reduction in capital requirements just because an investment is labelled green” – Michael Meister, Parliamentary State Secretary at Germany’s Federal Ministry of Finance

Giegold called it a “shopping expedition for all sorts of special interests” while Scott Cato said it “opens up quite a risky door”.
But it was not just the Greens who added their weight to growing criticism. “I really don’t like this favourable treatment for green investments,” said Sirpa Pietikäinen, the former Finnish finance minister and member of the influential centre right European People’s Party grouping, at the same meeting. She noted that “green can be bad for business”, adding: “Easier capital requirements are probably a very big mistake, possibly creating a bubble.”
The meeting also took evidence from experts. Joshua Ryan-Collins, Senior Research Associate at University College London, called green supporting factors the “right idea but the wrong policy tool”.
At an event in Berlin last week, Parliamentary State Secretary at Germany’s Federal Ministry of Finance, Michael Meister, said he “would have concerns regarding the so-called green supporting factor,” because “we doubt its feasibility and effectiveness, and we see a clear contradiction with the objective of financial stability”.“Please let me be very clear,” he told the audience, which included EU Vice President Valdis Dombrovskis and Director-General for Financial Stability, Financial Services and Capital Markets Union, Olivier Guersent – two of the leads on sustainable finance at the Commission. “There should be no reduction in capital requirements just because an investment is labelled green, but does not have a lower level of risk.”
Dombrovskis responded in a panel later in the day by conceding that “green does not mean risk free” and assuring the audience that “any measures would have to be carefully calibrated and based on a clear EU classification to avoid the risk of greenwashing and preserve the risk of financial instability”.
One possibility is that the EU will apply the changes only to a couple of ‘green’ asset classes, such as energy efficiency mortgages and electric vehicles. If this is the case, it will limit the amount of capital influenced by the initiative, but it may make it easier to prove a risk correlation at asset level.
When asked why the Commission had gone quiet around the idea of a parallel ‘Brown Penalising Factor’, which would tighten capital requirements for loans to fossil-fuel projects, Dombrovskis said: “We are assessing both options…. And indeed both are possible. But on balance, we tilt towards green supporting factors.”
He explained that this was partly because it could be based on the ‘green taxonomy’ currently being developed as part of the EU agenda, whereas to identify brown assets “you can either develop a brown taxonomy… or you need to declare that everything which is not green is brown, which could be a complicated approach”.
He said the second reason was that the EU wanted to encourage banks to invest in sustainable assets, rather than punish them for not. This, he insisted, had been the stance taken in similar regulatory moves in the past: “We introduced an ‘SME Supporting Factor’ to support small and medium enterprises; we didn’t introduce a ‘Big Companies Penalising Factor’. And we are applying the same logic here.” Other policy tools, like carbon pricing and fossil fuel taxes, already existed to dissuade lending to brown projects, he concluded.
Attention will now turn to the Commission’s Action Plan on Sustainable Finance, which is due later this month. How it handles the GSF in light of the emerging resistance will be an indicator of the political weight it gives to the idea.

Reporting by Daniel Brooksbank