Constraints and Incentives Working Group
Financial supervision and regulatory requirements do not necessarily stand in the way of sustainable finance. working group has found that financial institutions and supervisory authorities must do better when assessing sustainability risks.
If the Netherlands wants to meet the goals of the Paris Climate Agreement by 2040, it needs to invest an additional EUR 10 billion each year. The financial sector plays a key role in mobilising sustainable finance, but so far, concrete results are insufficient. The Constraints and Incentives Working Group of the Sustainable Finance Platform examined whether government policy, supervision and financial regulations act as impediments.
Supervision does not slow down sustainable finance
The working group states in its final report that regulations and supervision do not inhibit sustainable finance. The main cause of the lack of sustainable investments is the unfavourable risk-return profile – the risks are too high or the returns too low. Attractive sustainable investment opportunities are also very scarce.
Higher capital requirements
Part of the sustainable finance market is characterised by high risks and low liquidity, which is why higher liquidity and capital requirements apply. Some institutions say that this is hampering them, but according to the working group this does not qualify as a reason to abandon the principle of 'more risk, more capital'. If the prudential supervision framework were used to promote sustainable investments, financial institutions would be allowed to maintain buffers that are too low relative to their risk exposure.
A key issue is whether the risks associated with investments are correctly assessed, however. Current risk estimation models do not yet take into account the consequences of climate change. During a time of energy transition, the business models of carbon-intensive companies will come under pressure. The working group recommends institutions and supervisory authorities to improve their assessment methods and include sustainability risks in their analyses and policies. This will require more knowledge about this subject. In addition to stressing the importance of improving the information supply and risk management, the working group concludes that there seems to be no reason for adjusting supervisory frameworks or financial regulations.
Consistent government policies can help make sustainable investment more attractive. For example, it is now a government requirement that every office building has at least energy label C from 2023 onwards. For this reason, Dutch banks provide refinancing for office buildings with lower energy labels only if there are plans for rapid improvement. This is where banks' risk management measures help to accelerate the sustainable conversion of office buildings.
About the working group
The working group comprised representatives from the following financial institutions and firms : DNB, PGGM, NIBC, ING, TKP Investments, Delta Lloyd, AFM, MN and Aegon Asset Management. Willem Evers (DNB) chaired the working group, which was commissioned by Frank Elderson, Executive Director of DNB.