Are financial regulations impairing the transition to net zero?

The discussions around the role of the financial system in fostering the green transition have been steadily growing. Companies are increasingly required to quantify and disclose climate risks. However, the influential role of existing accounting and financial reporting requirements, and broader financial regulation, are not commonly considered to be a significant driver in the transition. Analyzing data and classifications from the European Banking Authority, we test whether existing frameworks might inadvertently be disincentivizing divestments from brown assets. We find that a significant bias exists – differences in the provision coverage ratio (PCR) reveal banks have to account for nearly double loan loss provisions for lending to non-brown sectors as to brown. We argue 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. Finally, we discuss the possible underlying drivers of this effect and some avenues for further research.