Model-based financial regulations impair the transition to net-zero carbon emissions

Gasparini, Matteo, Ives, Matthew C., Carr, Ben, Fry, Sophie and Beinhocker, Eric (2024) Model-based financial regulations impair the transition to net-zero carbon emissions. Nature Climate Change. ISSN 1758-678X

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Abstract

Investments via the financial system are essential for fostering the green transition. However, the role of existing financial regulations in influencing investment decisions is understudied. Here we analyse data from the European Banking Authority to show that existing financial accounting frameworks might inadvertently be creating disincentives for investments in low-carbon assets. We find that differences in the provision coverage ratio indicate that banks must account for nearly double the loan loss provisions for lending to low-carbon sectors as compared with high-carbon sectors. This bias is probably the result of basing risk estimates on historical data. We show that the average historical financial risk of the oil and gas sector has been consistently estimated to be lower than that of renewable energy. These results indicate that this bias could be present in other model-based regulations, such as capital requirements, and possibly impact the ability of banks to fund green investments.

Item Type:	Article
Official URL:	https://www.nature.com/nclimate/
Additional Information:	© 2024 The Author(s)
Divisions:	Grantham Research Institute
Subjects:	H Social Sciences > HC Economic History and Conditions H Social Sciences > HD Industries. Land use. Labor
Date Deposited:	12 Apr 2024 13:54
Last Modified:	22 Apr 2024 13:15
URI:	http://eprints.lse.ac.uk/id/eprint/122630

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