Green Mortgages, EU Taxonomy and Environment Risk Weigthed Assets: A Key Link for the Transition

Sustainability

31 Pages Posted: 30 Jan 2022

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: January 30, 2022

Abstract

The need for a quick and radical green transition gives a key role to the financial system as the main source to fund the change. This debate also involves the development of banking regulation tools able to serve the transition. Building on previous works, we propose a method to weight banks’ assets that combines conventional financial risks and environmental risks to calculate prudential capital requirements, and we apply it to the EU Taxonomy’s technical screening criteria to build an environmental risk indicator based on the buildings’ energy consumptions. We show how to calculate the tool endogenously for the taxonomy sections related to buildings (new construction, purchase of building, renovation), thus proving its immediate enforceability, using data from the Lombardy’s housing stocks. Finally, we conduct a stress test for the Italian banking system showing that our proposal would be an effective incentive for the banks to fund the green transition of the construction sector. Disclaimer

Keywords: climate change; prudential regulation; sustainable finance; EU Taxonomy; green mortgage

JEL Classification: g28; Q54

Suggested Citation

Esposito, Lorenzo and Mastromatteo, Giuseppe and Molocchi, Andrea, Green Mortgages, EU Taxonomy and Environment Risk Weigthed Assets: A Key Link for the Transition (January 30, 2022). Sustainability , Available at SSRN: https://ssrn.com/abstract=4021389 or http://dx.doi.org/10.2139/ssrn.4021389

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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