Stricter fossil fuel rules for EU bank capital voted down in blow to green groups

ECON committee also votes to include financial institutions in EU Corporate Sustainability Due Diligence Directive.

Legislative plans that could make it significantly more expensive for banks to finance fossil fuel projects fell at the first hurdle in a preliminary committee vote at the European Parliament this morning.

The influential Committee on Economic and Monetary Affairs (ECON) excluded a proposal that would require banks to put aside one euro of their own funds for every euro that finances new fossil fuel exploration or production to absorb any potential losses.

The result is a setback for green finance groups that have championed the so-called “one-for-one” regulatory standard in recent years. The groups argue that existing capital rules do not reflect the true risks of financing fossil fuel, allowing banks to enjoy artificial returns while relying on publicly funded bailouts to cover losses.

In the lead-up to the vote, 16 green NGOs – including ShareAction and Finance Watch – warned MEPs that fossil fuel exposures were inconsistent with international climate targets and “leaving this risk unchecked means exposing citizens and taxpayers to the potential fall-out”.

The proposed one-for-one standard was considered to be the most critical among several sustainability-related provisions voted on today by ECON as EU co-legislators move to finalise the implementation of the international Basel III banking reforms.

The committee separately voted to approve measures that will take into account climate transition plans and targets when assessing regulatory prudential requirements for banks.

ECON will now commence negotiations with member state representatives from the European Council to agree on a final text for the banking reforms, after MEPs voted overwhelmingly in favour of a mandate to negotiate. A slimmer result would have required a plenary vote of MEPs to endorse the start of negotiations.

Green NGOs have indicated to Responsible Investor that they will focus their efforts on convincing MEPs to explicitly vote on the one-for-one measure in a plenary.

Details of today’s vote, including the amended proposal text and tallies, will be published by parliament within two weeks.

CSDDD vote

In related news, ECON has voted in favour of its “compromise package” regarding the bloc’s corporate sustainable due diligence directive (CSDDD). 

The long-awaited draft of the directive, which would impose mandatory human rights and environmental due diligence requirements across the market, was published by the European Commission in February 2022. Reactions to the draft proposal were mixed, but it has been broadly welcomed by the investor community.   

In November, the directive’s rapporteur Lara Wolters, an MEP in the Socialists and Democrats Group, published a report with an estimated 250 amendments to the commission’s proposal. 

Tuesday’s vote saw ECON vote on its compromise package regarding the Commission’s proposal. Once all other relevant Committees have done this, the Committee on Legal Affairs will consider these and make its own amendments to Wolters’ report before voting on the proposal in March. 

Following a plenary vote, there is expected to be a parliamentary mandate for the proposals by May, at which point they will be put to the council for negotiation. 

ECON’s package – which was approved 32 vs 23, with one abstention – sees financial institutions firmly placed in the directive. 

In particular, a new Article 8(a) has been given the green light, which details appropriate measures by institutional investors and asset managers to induce their investee companies to bring actual adverse impacts caused by them to an end. 

This sits alongside the already existing Article 8, which relates to actions by companies. 

The right-wing EPP Group had tabled an alternative compromise package, which would have exempted all investment firms – including alternative investors and UCITS – from inclusion in the directive. However, its proposals were rejected.

Rene Rapasi, the rapporteur of the ECON committee and an MEP in the S&D group, said after the vote: “The result is clear: no carve out for financial services and no time limitation for due diligence obligations. Investments into illegal deforestation projects in the Amazon rainforest or banks entering into business relationships with companies that violate human rights: these are examples of the great influence of the financial sector on responsible corporate behaviour.”

Isabelle Ritter, EU policy officer at ShareAction, also welcomed the vote. “Today, the ECON committee of the European Parliament has sent the strong signal that financial institutions need to care about their impacts to planet and people,” she said. 

“The adopted report sets a crucial step in the right direction for harnessing the power and potential of the financial sector. Carrying out human rights and environmental due diligence will allow financial actors to better manage their financial risks and harmful impacts on the planet and the people.” 

Echoing Ritter, Richard Gardiner, EU public policy lead at the World Benchmarking Alliance, told RI: “This is a significant indication of the direction of corporate accountability for financial flows. Despite best efforts, data from our Financial System Benchmark tells us that finance has not moved as quickly as needed and there is growing momentum to fill the current accountability gap with regulation.

“This provides an opportunity for market leaders to come forward and help shape the sustainable landscape, while on the flip side presenting a risk that laggards in the industry who reject change could be left behind.”