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One-for-One is only fair: time for banks and insurers to face fossil fuel risks

Alongside Finance Watch and other NGOs and academics involved in the Regulate Climate Risk Coalition, we're calling for “one-for-one” prudential capital requirements on fossil fuel financing by banks and insurers.

At COP26, the United Nations Climate Change Conference in Glasgow, world leaders and financial institutions gathered to make plenty of grand announcements, sign official pledges and lay out plans to address climate risks and the transition to a low-carbon economy.

But at the very same time, companies are developing huge new fossil fuel exploration and extraction projects across the world.

The new public database Global Oil & Gas Exit List reveals that companies are still building new oil and gas pipelines and investing trillions of dollars in projects that will lock in high emissions for decades to come.

All new oil and gas ventures need banks, investors and insurers

Behind each company planning new oil and gas ventures there are banks, investors and insurers without whom these projects could not be realised.

Besides fuelling the climate crisis through their investing, lending and underwriting decisions, banks and insurers will themselves be directly affected by environmental degradation.

More frequent and severe disasters such as heatwaves and floods mean that insurance companies facing huge claims, and financial institutions being exposed to financial losses through assets and business operations impaired by climate-change related catastrophes.

What’s more, with the transition to net zero, the fossil fuel assets that banks and insurers hold will rapidly diminish in value or could become entirely worthless. Massive losses will follow for financial institutions, which could result in them requiring bailouts paid for by the public.

There are solutions to avert worsening climate breakdown and stranded assets

A growing number of experts are proposing a simple solution to this impending crisis: implementing "one-for-one" capital requirements for the financing of new fossil fuels.

This is a form of financial regulation that means: for each euro/dollar that finances fossil fuels, banks and insurers should have a euro/dollar of their own funds held liable for potential losses.

This basic risk management principle is already applied to other high-risk exposures. For example, the Basel Committee on Banking Supervision (the global standard setter for the regulation of banks) just recommended the one-for-one be applied to some cryptocurrencies’ exposures.

Why should the financing of fossil fuels, which poses a far bigger threat to the entire global economy, be considered less risky?

We need a one-for-one regulatory standard for financing new fossil fuel projects

We believe regulators must act immediately.

A one-for-one regulatory standard for financing new fossil fuels projects would mean that banks and insurance companies are gambling with their own money, not the public’s.

Current capital rules, which are supposed to be risk-based, currently overlook the risks that come with financing fossil fuels. This makes fossil fuel exposures artificially more profitable – which equates to a very problematic public subsidy. This is on top of the $1.54 million in direct subsidies and tax breaks the fossil fuel industry gets from governments every single minute.

Voluntary measures by financial institutions won't be enough

Markets are notoriously bad at self-correcting, as we discovered in 2008. Voluntary measures by financial institutions won't be sufficient, as there are limited incentives for financial institutions to change their behaviour as long as profits can be made in the short-term.

For instance, out of the eight founding members of the Net Zero Insurance Alliance, three received a rating of C or below as part of ShareAction’s 2021 rating and ranking of the world’s largest insurance companies on responsible investment governance, climate change, biodiversity and human rights.

In fact, not a single one of the world's 70 largest insurance companies was found to have underwriting restrictions on oil and gas, while only half have restrictions on coal.

ShareAction also recently demonstrated that whilst most of Europe’s top banks have committed to net-zero, they all lack a comprehensive plan to get there. Less than half of the banks survey have committed to a phase-out of financing to thermal coal-related activities and most of these policies are ridden with loopholes.

A one-for-one standard is the robust regulation needed to ensure banks and insurers that finance fossil fuels are adequately prepared for the losses they’re ready to suffer.

We’re calling on world leaders to take action now and protect us from a potential financial crisis.

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