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After ‘HLEG’: EU Banks, Climate Change Abatement and the Precautionary Principle

Published online by Cambridge University Press:  30 August 2018

Jay CULLEN
Jay CULLEN*
Affiliation:
University of Sheffield
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Abstract

The EU is making progress in reducing its carbon footprint. The creation of a High-Level Group on Sustainable Finance has supplemented recent market-led initiatives and provided some recommendations for future reform. This article argues that more remains to be achieved. In particular, in light of the fundamental structural uncertainties attached to climate change, precautionary approaches to the funding of GHG-intensive industries are worth contemplating. Such measures include raising the capital requirements on assets with ‘brown’ credentials. The high dependence on banks for external financing in the EU makes these reforms particularly appropriate for implementation within the bloc.

Keywords

HLEGbankscapitalgreen assetsprecautionary principle
Type
Articles
Information
Cambridge Yearbook of European Legal Studies , Volume 20 , December 2018 , pp. 61 - 87
Copyright
© Centre for European Legal Studies, Faculty of Law, University of Cambridge 

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Footnotes

*

Reader in Banking Law and Financial Regulation, School of Law, University of Sheffield and a member of the Sustainable Market Actors for Responsible Trade (‘SMART’) Project (uio.no/smart), which is based at the University of Oslo. The SMART Project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 693642, and we gratefully acknowledge its support.

References

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2 See, for example, the Paris Climate Agreement, which has the central aim of capping future global warming by two degrees Celsius, was ratified in 2016 following the acceptance of its protocols by the vast majority of parties to the United Nations Framework Convention on Climate Change. See United Nations, Paris Agreement (2015).

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37 Ibid.

38 European Commission and DG Climate Action, Shifting Private Finance Toward Climate-Friendly Investments (March 2015).

39 Directive 2010/31/EU of the European Parliament and of the Council of 19 May 2010 on the energy performance of buildings: [2010] OJ L153/13.

40 Directive 2012/27/EU of the European Parliament and of the Council of 25 October 2012 on energy efficiency, amending Directives 2009/125/EC and 2010/30/EU and repealing Directives 2004/8/EC and 2006/32/EC: [2012] OJ L315/1.

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53 As noted by Hands: ‘This is the “rational economic agent” of mainstream microeconomics—the agent who maximizes a well-behaved utility function subject to a budget constraint in demand theory and makes decisions based on maximization of expected utility in risky environments—as well as the rational individual agents in “decision theory” and “rational choice theory” … this familiar utility-maximizing individual is used to model the demand, supply or equilibrium of an entire market or characterize the equilibrium of an entire economy’. See Hands, DW, ‘Conundrums of the Representative Agent’ (2017) 41 Cambridge Journal of Economics 1685 CrossRefGoogle Scholar.

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56 EU Directive 2014/95/EU regarding disclosure of nonfinancial and diversity information by certain large companies and groups: [2014] OJ L330/1.

57 See note 19 above, p iii.

58 Financial Stability Board, Proposal for a Disclosure Task Force on Climate-Related Risks (9 November 2015).

59 Ibid.

60 Mark Carney, ‘Better Market Information Can Help Combat Climate Change’ (Financial Times, 28 June 2017) https://www.ft.com/content/51e60772-5bf5-11e7-b553-e2df1b0c3220?mhq5j=e6.

61 Ibid. Indicatively, the European Banking Federation (‘EBF’) argues that: ‘Clear terminology must be defined and financial regulation needs to be assessed at every level to achieve optimal disclosure and transparency and to ensure success. … A common taxonomy, set of minimum standards and disclosure framework on Green Finance are essential for efficient allocation of financial resources to green projects …’. See EBF, Towards a Green Finance Framework (2017), pp 2, 7. The TCFD argues that: ‘Without the right information, investors and others may incorrectly price or value assets, leading to a misallocation of capital. … Increasing transparency makes markets more efficient and economies more stable and resilient’. See note 19 above, p 3.

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70 According to two of the authors of the 2014 IPCC Report, ‘The [2°C] goal is effectively unachievable. Owing to continued failures to mitigate emissions globally, rising emissions are on track to blow through this limit eventually. To be sure, models show that it is just possible to make deep planet-wide cuts in emissions to meet the goal. But those simulations make heroic assumptions—such as almost immediate global cooperation and widespread availability of technologies such as bioenergy carbon capture and storage methods that do not exist even in scale demonstration’. See Victor, DG and Kennel, CF, ‘Climate Policy: Ditch the 2°C Warming Goal’ (2014) 514 Nature 30, pp 30–31 CrossRefGoogle ScholarPubMed. See also Raftery et al, who argue that: ‘The likely range of global temperature increase is 2.0–4.9°C, with median 3.2°C and a 5% (1%) chance that it will be less than 2°C (1.5°C)’. See Raftery, AE, Zimmer, A, Frierson, DMW, Startz, R and Liu, P, ‘Less than 2°C Warming by 2100 Unlikely’ (2017) 7 Nature Climate Change 637 CrossRefGoogle ScholarPubMed.

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77 See note 69 above, p 7.

78 Fair Finance Guide, Undermining our Future: A Study of Banks’ Investments in Selected Companies Attributable to Fossil Fuels and Renewable Energy (2 November 2015), p iv.

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81 BankTrack et al, Banking on Climate Change: Fossil Fuel Finance Report Card (June 2017).

82 ShareAction, Banking on a Low-Carbon Future (December 2017).

83 European Systemic Risk Board, Too Late, Too Sudden: Transition to a Low-Carbon Economy and Systemic Risk (February 2016) Reports of the Advisory Scientific Committee, No 6, p 2.

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89 L Zhang and M Massa, ‘The Spillover Effects of Hurricane Katrina on Corporate Bonds and the Choice Between Bank and Bond Financing’ (AFA, 2012) Chicago Meetings Paper.

90 UN Rio Declaration on Environment and Development, Vol I, A/CONF.151/26.

91 Framework Convention on Climate Change (May 9, 1992), 31 ILM (1992), pmbl 9.

92 For example, see the arguments presented to the World Trade Organisation (‘WTO’) between the EU on the one hand, and the US, Canada, and Argentina on the other, concerning the status of the precautionary principle in international law in European Communities. Measures Affecting the Approval and Marketing of Biotech Products, Report of the Panel, WT/DS291/R, WT/DS292/R and WT/DS293/R, Final Report issued 29 September 2006.

93 COM (2000) 1 final (2.2.2000), Communication from the Commission on the Precautionary Principle.

94 For example, the Water Framework Directive (notably where the identification of priority hazardous substances is concerned) decisions regarding phthalates take the principle into account.

95 See Regulation (EU) No 528/2012 of the European Parliament and of the Council of 22 May 2012 concerning the making available on the market and use of biocidal products: [2012] OJ L167/1.

96 See Regulation (EC) No 1907/2006 of the European Parliament and of the Council of 18 December 2006 concerning the Registration, Evaluation, Authorisation and Restriction of Chemicals (‘REACH’), establishing a European Chemicals Agency, amending Directive 1999/45/EC and repealing Council Regulation (EEC) No 793/93 and Commission Regulation (EC) No 1488/94 as well as Council Directive 76/769/EEC and Commission Directives 91/155/EEC, 93/67/EEC, 93/105/EC and 2000/21/EC: [2006] OJ L396/1.

97 See Directive 2009/41/EC of the European Parliament and of the Council of 6 May 2009 on the contained use of genetically modified micro-organisms: [2009] OJ L125/75.

98 Consolidated version of the TFEU Part Three: Union Policies and Internal Actions – Title XX: Environment – Article 191 (ex Article 174 TEC): [2016] OJ C202 1-388.

99 Ashford, NA, ‘The Legacy of the Precautionary Principle in US Law: The Rise of Cost-Benefit Analysis and Risk Assessment as Undermining Factors in Health, Safety and Environmental Protection’ in N De Sadeleer (ed) Implementing the Precautionary Principle: Approaches from the Nordic Countries, the EU and the United States (Routledge, 2007)Google Scholar.

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101 See note 64 above, p 10.

102 See note 93 above, pp 4–5.

103 Ibid, p 6.

104 See note 14 above, p 1017.

105 See note 102 above, p 3

106 See note 14 above, p 1017.

107 Ibid, p 4

108 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC: [2013] OJ L176/338.

109 Basel Committee on Banking Supervision, Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (December 2010, rev June 2011).

110 See note 84 above.

111 K Alexander, ‘Stability and Sustainability in Banking Reform: Are Environmental Risks Missing in Basel III?’ (CISL & UNEP FI, 2014), p 15.

112 Ibid, p 19.

113 J Brunsden, ‘Brussels Looks at Easing Bank Capital Rules to Spur Green Investment’ (Financial Times, 10 January 2018).

114 See, for example, the HLEG comment that: ‘There is … a perception that calibrations on project financing and specialised lending are high. Feedback from banks with a long history of project financing suggests that regulatory capital requirements far exceed economic capital calculations’. See note 50 above, p 32.

115 European Commission, Fact Sheet: Frequently Asked Questions: Action Plan on Financing Sustainable Growth, Brussels (8 March 2018), p 3.

116 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012: [2013] OJ L176/1.

117 Commission Delegated Regulation (EU) 2017/1542 of 8 June 2017 amending Delegated Regulation (EU) 2015/35 concerning the calculation of regulatory capital requirements for certain categories of assets held by insurance and reinsurance undertakings (infrastructure corporates): [2017] OJ L236/14.

118 Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements, and amending Regulation (EU) No 648/2012, COM (2016) 850, p 3.

119 S Matikainen, Green Doesn’t Mean Risk-Free: Why We Should Be Cautious About a Green Supporting Factor in the EU (Grantham Research Institute on Climate Change and the Environment, 18 December 2017) http://www.lse.ac.uk/GranthamInstitute/news/eu-green-supporting-factor-bank-risk.

120 A Boot and D Schoenmaker, ‘Climate Change Adds to Risk for Banks, but EU Lending Proposals Will Do More Harm than Good’ (Bruegel, 16 January 2018) http://bruegel.org/2018/01/climate-change-adds-to-risk-for-banks-but-eu-lending-proposals-will-do-more-harm-than-good.

121 See note 111 above.

122 Ibid, p 16.

123 European Banking Authority, Report on SMEs and SME Supporting Factor, EBA/Op/2016/04 (23 March 2016).

124 Ibid.

125 Articles 144(2), 173(3), and 180(3)(b) of Regulation (EU) No 575/2013.

126 See note 49 above, p 31.

127 H Fraisse, M Lé and D Thesmar, The Real Effects of Bank Capital Requirements (ESRB, June 2017) Working Paper Series No 47.

128 Bank of England, The Financial Policy Committee’s Powers to Supplement Capital Requirements: A Policy Statement (January 2014), p 10.

129 Chaudhry, SM, Mullineux, A and Agarwal, N, ‘Balancing the Regulation and Taxation of Banking’ (2015) 42 International Review of Financial Analysis 38 CrossRefGoogle Scholar.

130 See note 84 above, p 6.

131 This valuable point was made by a reviewer of the article.

132 For example, according to the Financial Times, ‘Pension funds cite both ethical and financial reasons for reducing exposure to fossil fuels’. See A Mooney, ‘Growing Number of Pension Funds Divest from Fossil Fuels’ (Financial Times, 28 April 2017).

133 For example, according to Arabella Advisors: ‘On the one-year anniversary of the Paris climate agreement, the value of assets represented by institutions and individuals committing to some sort of divestment from fossil fuel companies has reached $5 trillion. To date, 688 institutions and 58,399 individuals across 76 countries have committed to divest from fossil fuel companies, doubling the value of assets represented in the last 15 months’. See The Global Fossil Fuel Divestment and Clean Energy Investment Movement (December 2016) https://www.arabellaadvisors.com/wp-content/uploads/2016/12/Global_Divestment_Report_2016.pdf. Such momentum continued in 2017, with institutions including the World Bank, Axa, ING, Norway’s Government Pension Fund Global, and the New York City Common Fund declaring they would scale back or end investment in some fossil fuel industries.

134 AG Haldane, ‘Control Rights (and Wrongs)’, Wincott Annual Memorial Lecture, Westminster, London, 24 October 2011.