The Importance of Practicality: The Role of a Transition Green Asset Ratio for Banks

In Europe, the EU green taxonomy has been developed, and banks will have to start reporting their green asset ratio in 2024. Developments are also taking place so that capital requirements can be associated with the level of “green” loans that a bank has taken. Acknowledging the enlightenment that this approach could bring, it also incentivizes banks to lend money to green companies and potentially not to those that are still not green. Taking into account that a very small proportion of European companies are aligned with the EU green taxonomy, this could also be a very small market for banks. As such, this article argues for the importance of a transition green asset ratio that can be used by banks to actively promote the transition towards an economy aligned with decarbonization in 2050.