Extending ‘Environment-Risk Weighted Assets’: EU Taxonomy and Banking Supervision

Posted: 20 Jul 2020

See all articles by Lorenzo Esposito

Lorenzo Esposito

Bank of Italy

Giuseppe Mastromatteo

Catholic University of the Sacred Heart of Milan

Andrea Molocchi

Independent

Date Written: June 27, 2020

Abstract

Changing the economy to meet the goals posed by the Paris Agreement implies a financial system aligned to this end. This debate also involves a reconsideration of aims and tools of banking regulation although, for now, the discussion is still not very operational. In a previous work we introduced the ‘environment-risk weighted assets’ to internalize the pollution risk of the borrower that here we expand empirically to calculate the ‘external costs footprint’ of Italian corporate lending and to cover virtually every part of banks’ business. Moreover, we analyse whether our proposal is aligned to the European Union taxonomy on environmentally sustainable activities. We show that our framework can help to put on a working track the discussion on banking regulation for sustainable finance.

Keywords: Climate change, prudential regulation, sustainable finance

JEL Classification: G28, Q54

Suggested Citation

Esposito, Lorenzo and Mastromatteo, Giuseppe and Molocchi, Andrea, Extending ‘Environment-Risk Weighted Assets’: EU Taxonomy and Banking Supervision (June 27, 2020). Available at SSRN: https://ssrn.com/abstract=3636933

Lorenzo Esposito (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giuseppe Mastromatteo

Catholic University of the Sacred Heart of Milan ( email )

Largo Gemelli, 1
Via Necchi 9
Milan, MI 20123
Italy

Andrea Molocchi

Independent

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