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Research group for Natural Resource Law, Environmental Law and Development Law
Seminar

Seminar: Can regulatory capital be "green"?

On Friday the 10th of June, the research group held a digital seminar with Eyolf Aarø on bank regulatory capital, discussing whether such financial instruments legitimately can be labelled "green".

Portrait Eyolf Aarø
Photo:
Trygve Hals Butenschøn

Main content

Regulatory capital is a relatively narrow area within (green) finance. Nevertheless, the topic provides a good starting point for discussing green labeling in a broader perspective. What legal requirements should be set for "green" capital instruments? Is the EU catching up? What other financial regulatory adjustments can and should be made to improve the financial system's resistance to climate risk? The alternatives are many, and the importance of these questions increases in step with the growing climate challenge.

Contingent convertible bonds ("CoCos") became popular among banks after the financial crisis, as a means of meeting capital adequacy requirements more easily. These bonds are a form of hybrid capital that converts to equity if (a) the bank's regulatory capital falls within specified capital requirements or (b) the financial supervisory authorities believe that the bank must increase its regulatory capital. A new trend, in line with the green wave in finance in general, is to label regulatory capital as «green».

In the paper "Do not let the Green Grass Fool You" Aarø argue that these regulatory functions, which are intended to ensure financial stability, are incompatible with "green" labels. In addition to being critical of the very legality of this green marking, Aarø proposes to separate "green" banking units from the rest of the financial group, in order to ensure that the green marking is legitimate. In the long run, such segregation will be able to improve banks' resistance to climate risk, as well as make it easier to meet capital requirements that in the future may be adjusted based on the bank's volume of green and brown exposure (through a so-called green support factor or brown penalty factor).

Eyolf studied law in Bergen, and recently finished an LLM degree at UC Hastings Law. The research group thank Eyolf for this interesting seminar!