Banks’ prudential regulation is important for the green transition – regulation must support both financial stability and sustainable economic growth

Ilmakuva vihreästä sademetsästä
Photo: Shutterstock / Malinak
  • Post-financial crisis regulation has strengthened the banking sector’s resilience.
  • The content and objectives of banking regulation are continuously developing. The key goal of new regulation is to create an environment which enables sustainable economic growth and supports banks’ resilience.
  • FFI’s Adviser Jussi Kettunen analysed the role of banks’ prudential regulation in enabling the green transition.

The EU taxonomy for sustainable finance, launched in 2020, provides uniform criteria for environmentally sustainable economic activities. There is great demand for sustainable investment options, and taxonomy-alignment enables companies to stand out in the market. It must be kept in mind that the taxonomy itself does not prohibit or label any kind of economic activity as unsustainable.

The taxonomy is a living tool, designed to change and develop over the years. Finance Finland (FFI) considers it important that the work on the taxonomy and the harmonisation of definitions in the EU financial market is continued. At the moment, the biggest value of the taxonomy lies in the fact that it enables us to discuss sustainable finance in concrete terms. Debate around the topic will undoubtedly continue in the future.

Finance Finland’s role is not to comment on the details of the delegated act’s technical criteria for different economic activities. Evaluation of the criteria requires in-depth expertise from the different sectors. FFI therefore focuses only on the applicability of the taxonomy as a basis for financial products and financing decisions.

In the future, the sustainability of investment will become increasingly relevant also in prudential regulation; for example, in the forthcoming regulation concerning credit institutions’ sustainability risk considerations.

“This would mean, for example, amending the CRR to include the definitions of different kinds of sustainability risks: ESG risk, climate risk, physical risk, transition risk, social risk, and governance risk”, explains FFI’s Adviser Jussi Kettunen.

“Prudential regulation governs the stability of the entire financial sector and has a big impact also on banks’ capacity to finance businesses.”


Kettunen wrote a report analysing green finance and the green transition from the perspective of banks’ capital requirements calculation. Especially climate crisis risks may be financially very significant.

“Prudential regulation governs the stability of the entire financial sector and has a big impact also on banks’ capacity to finance businesses. Sustainability risks are a material part of overall risk management, so it is important that they reliably reflect the financial risks shouldered by the credit institution. Elements otherwise not used in risk-based calculation must therefore not be included in the requirements. The focus of the approach must be maintained on comprehensive risk assessment and proportionate pricing of risks”, Kettunen says.

The financial sector is strongly in support of integrating sustainable development principles into financial sector regulation. However, sustainable finance regulation must be prepared and finalised carefully.

“The risk of over-regulation is ever present, and even the previous sustainable finance action plan proved much more complex to implement than anticipated at the time of its launch. Every new legislative project needs to reserve sufficient time for preparatory work and the consultation of stakeholder groups”, Kettunen points out.

Still have questions?


Contact FFI experts