The need for a rapid and radical green transition assigns a key role to the financial system as the main source of financing for change. This debate also involves the development of banking regulatory tools capable of serving the transition. Building on previous work, we propose a method for calculating capital prudential requirements based on a weighting of bank assets that combines conventional financial risk with environmental risk.

The method is applied to the technical screening criteria for “green buildings” as envisaged by the EU Taxonomy Regulation, using an environmental risk indicator based on building energy consumption. Using data on energy certifications of buildings in Lombardy, we demonstrate how this tool can be calculated endogenously for the sections of the Taxonomy related to buildings (new constructions, building acquisitions, renovations), thereby showing its immediate applicability.

Finally, we conduct a stress test of the Italian banking system that demonstrates how our proposal would provide an effective incentive for banks to finance operations necessary for the ecological transition in the construction sector. Disclaimer: The views expressed are those of the authors and do not involve the responsibility of the Bank of Italy or RSE.