Regulators have the magic wand to green the banking sector. Why won’t they wave it?

What role should regulators play in safeguarding the financial system from climate-related disruption? Thierry Philipponnat, Head of Research and Advocacy at Finance Watch in Brussels, is the author of a recent report called “Breaking the Climate Finance doom loop”.

This report goes to the heart of a fundamental debate about the role of finance in society, what the public interest is, and how regulators should best serve that interest. It asks a simple question: Why is it that brown lending is not treated as a high-risk activity by regulators?

In the interview, we find out what the doom loop is all about and how to break it. We also learn about Thierry’s unusual journey from writing protest letters to Brezhnev and Pinochet when he was in high school, to training as an economist and financial expert, and campaigning for Amnesty International.


Thierry Philipponnat is the Head of Research and Advocacy of Finance Watch. After graduating from the Institut d’Etudes Politiques de Paris and gaining a Masters degree in economics, Thierry Philipponnat was an investment banker and a financial market specialist for 20 years working, among others, for UBS, BNP Paribas and Euronext.liffe alternatively in London and in Paris.

In 2006, Thierry Philipponnat crossed into the NGO world, campaigning and lobbying on behalf of Amnesty International and becoming a member of its Executive Board in France. In 2011, he founded the European NGO Finance Watch in Brussels, which he managed as its first Secretary General until 2014. Subsequently, he became Chairman of the French Sustainable Investment Forum (FIR) and Director of the economic think tank Institut Friedland.

Thierry Philipponnat is a member of the Board of the French Financial Markets Authority (Autorité des Marchés Financiers, AMF) and a member of the Sanctions Committee of the French Banks and Insurance Companies Supervisor (Autorité de Contrôle Prudentiel et de Résolution, ACPR). He chairs the AMF’s Climate and Sustainable Finance Commission as well as its Market consultative Commission. He is a member of ACPR’s Climate and Sustainable Finance Commission and of its Scientific Committee.


Breaking the climate-finance doom loop – Finance Watch report, June 8 2020

COVID-19: What impact on finance, the economy, people and the environment? – Finance Watch dossier, May 14 2020

“Nature’s Return” on integrating economic and environmental governance – Finance Watch report, May 4 2020

How can safer banks hurt the EU economy? – Finance Watch report, December 11 2019


This is not being radical, it’s not being an extremist. Saying that if you work for Amnesty International, torture is not acceptable, I don’t think it’s radical. Saying if you work with Financial Watch that moral hazard in banking, in which the extreme losses are carried by society, but the profits are going to private pockets, is not being radical.

Today we look at the responsibility of regulators to safeguard the financial system from climate-related disruption.

This is a hot topic that’s making headlines on both sides of the Atlantic right now, so I was excited to talk to Thierry Philipponnat, who’s head of research and advocacy at Finance Watch in Brussels, and the author of a recent report called “Breaking the Climate Finance doom loop”.

This report goes to the heart of a fundamental debate about the role of finance in society, what the public interest is, and how regulators should best serve that interest.

It asks a simple question: Why is it that brown lending is not treated as a high-risk activity by regulators?

In the interview, we find out what the doom loop is all about, how to break it via the rules on banks’ capital risk requirements. We also learn about Thierry’s unusual journey from writing protest letters to Brezhnev and Pinochet when he was in high school, to training as an economist and financial expert, and campaigning for Amnesty International.

I hope you enjoy our conversation.

Denise: You’re an economist by training and you’re currently head of research and advocacy at the Brussels-based NGO, Finance Watch, which you actually founded in 2011.

You’re also on the board of, uh, the French financial markets or authority. And you’re a technical expert on sustainable finance and a member of the European commission’s technical expert group on sustainable finance. In addition, during your career, you spent some time campaigning and lobbying on behalf of Amnesty International, uh, which I think is quite unusual for someone of your background.

And this reminded me of the, the French term, the concept of “le marginal secant”, which came from a French sociologist, Michel Crozier, coming from geometry, referring to someone who cuts across several points in a system, and who’s able to intermediate and communicate across them. So, my first question is, how are you wearing these multiple hats, which are really mixing up the quantitative and the qualitative.

Thierry: Well, it’s, um, you know, the multiple hats, really, when you think about it, I mean, you’re just one person and I’ve always had that feeling in me that, um, you need at the same time to take the world as it is. And to try to improve it, try to make it move, to move the lines. Um, hence the fact that, you know, I worked in the finance industry for 20 years, uh, which is a very concrete day to day work of doing financial transactions, et cetera.

But at the same time, knowing very well that if life is about this, it’s also about trying to improve, the system.  life is both qualitative and quantitative and in many instances, you need to be able to take the two approaches to come to, to something, uh, significant, something that makes sense.

Something that can make a difference. And there’s no reason to why there should be an opposition between the two. 

Denise: Could you talk a little bit about your work at amnesty international? I mean, did you have some aha moment during that time where you were really immersed in advocacy that led you to create finance watch as an NGO?

Thierry: Yes. I mean with pleasure. I had been a member of amnesty international, since I was a teenager, At the time I was writing, I would write letters to Brezhnev and Pinochet after I came back from high school saying stop torturing.

Um, so I had been a member of Amnesty international for decades, literally. When I left the finance industry, I rang up my, the association, I had been a member for a long time and said, do you have any need for, for someone like me and someone like me was really someone just out of 20 years of working in the banking and financial industry.

And at the time they were just working on human and business rights issues. And, uh, they had started a campaign in France, um, linking, um, the topic of human rights with the finance industry. And in particular, trying to get, um, the French banks and insurance company to stop supporting the cluster munitions and landmines industry.

And then, you know, I did many things for them, um, working in basically business and human rights.

Uh, I worked on corporate social responsibility, which was a big topic or emerging at the time.  And then the Finance Watch opportunity came up, and the way it came up was that a number of the members of the European parliament in 2010 in Brussels launched a call saying that there was a need for an organization that would represent the public interest in the financial regulation debate. 

Those members of the European parliament were saying that they had in their office literally every day the representatives of the financial lobby were pleading for their own interest, which is fine, c’est la vie, people defend their interests. No problem with that, but if you’re a legislator, you need to hear the same story from a different angle. And that different angle is the public interest angle. Basically there was a meeting in Paris in September, 2010 where they invited all the big NGOs saying, you know, we want to launch this new NGO called Finance Watch. What do you think of it? 

But then probably three or four weeks later, the same members of the European parliament launched a call for application, for candidates to manage the project of Finance Watch and they were looking for someone who had financial industry experience and NGO experience.

So I thought, well, maybe I’m the right person to do this. So I raised my hands and yeah, there was a recruitment process and they picked me at the time as the project manager of Finance Watch. Ie there was absolutely nothing, just an idea, and you had to make it happen.

So that’s how it all started.

Denise: That’s really interesting. I can imagine Amnesty International would be very happy to have someone with your skills and expertise on board, you know, doing that work, but I wonder did your involvement with them have any impact on the perception, how your financial industry and regulatory peers were perceiving you. Because I know this is an issue in the scientific community. 

When the scientist is perceived as being too activist, it can backfire on their reputation and people like to use it as a way to undermine some of their work.

Thierry: That’s an excellent question. Well, that’s a constant of the work you do when you work for civil society organizations. The people who do not agree with you, and it’s part of the game that some people will not agree with you, will either ignore you or try to ignore you. 

And when they cannot ignore you any longer, what they try to do is to portray you as radical, as an extremist, as someone, okay, nice idea, we like him. But don’t listen to him. He doesn’t know the real world. And that was true at Amnesty International and it is certainly true at Finance Watch. It happens all the time. So the work is really, first of all, I’m certainly not extremist. I don’t consider myself as radical. I consider myself as someone who tries to look at things as they are.

I see NGO work really, as let’s look at the world, let us describe it as it is and not as something else. And then when what we see is not satisfactory, let’s try to improve it. As simple as that. The principles are simple, the practice is another thing.

This is not being radical, it’s not being an extremist. Saying that if you work for Amnesty International, torture is not acceptable, I don’t think it’s radical. Saying if you work with Financial Watch that moral hazard in banking, in which the extreme losses are carried by society, but the profits are going to private pockets, is not being radical.

It’s just being in my way sensible.

So I don’t think this is anything to do with partisan views or, or radical, not radical. It is to do with, trying to, to contribute for society to be coherent. And this is really the way I approach this whole thing. 

But as you rightly say, Denise, people will always try to portray you as, as an extremist, not to be trusted or listened to.

Denise: Your description of describing the world as it is really resonates, because today I wanted to talk about this new report that Finance Watch, you authored, I believe, launched quite recently on the climate finance doom loop. 

What struck me about this report was that it really cuts through the fog of a lot of these acronyms jargon and you know, core concepts that many people in sustainable finance throw up as a kind of smokescreen around their activity.

And it is actually incredibly difficult for an outsider to see it is how it is as it is, as you say.

Now before we go it into the report, however, I just wanted to ask you. I noticed on the Finance Watch website that the mission is to make finance serve society. I think this is something that a lot of people would be surprised to hear especially since the financial crisis of 2008.

Because I think the public perception is more that finance serves itself. And indeed has been able during that crisis to co opt governments and regulators in some way to perpetuate business as usual in their own interest. 

Could you start out by explaining the difference between government and regulators and on how much independence regulators actually have, and whether or not it’s their business to do policymaking.

Thierry: Well, the regulator, you know, has a mission to work in the public interest. That’s precisely the mission of the regulator. And so to me, it’s very, very coherent with the mission of a finance watch, which is to plead for the public interest when the regulator has to apply the law in a direction that’s compatible with, with the public interest. So I see it as extremely coherent.

On the difference between regulators and governments, I think you need to introduce a third player, which is legislators as well. As in parliaments and elected officials. We are lucky enough in this part of the world to live in democracies. So therefore legislation, as in the rules that govern our countries are decided, or they are usually initiated by governments and adopted by parliaments.

Hence my introduction of the legislative dimension. This is what we call in the jargon, Level One, and this is really what is the law, you know, and if you think EU law is called directive or regulation, doesn’t matter. It is the law. As in what is the fundamental rule governing a certain activity.

It starts there. And then regulators come, in our jargon, at Level Two, ie once Level One EU law has been adopted, regulators come in and say, okay, I’m going to a) refine the law because the law is very often at a very high level. And you need to be very, very specific in particular, in the field of finance. There’s a lot of detail that needs to be very very precise in order to be applicable. 

So the regulator does that and then the regulator is very often a supervisor as well. And the supervisor, as the name indicates, has the job of making sure supervising, that the rules that have been adopted at Level One law and Level Two detail of the law are actually applied  by whoever is supposed to apply them.

Denise: Okay. So let’s talk about the report. Would you like to start by giving a short summary of what it is, where the idea came from and we’ll talk about the recommendation a bit later.

Thierry: There’s a number of issues that are not properly addressed in the debate about a) sustainable finance b) impact of climate change on financial institutions.

And also about the way you can actually tackle the problem. 

Basically the issue is not properly addressed because it’s a double paradox. First paradox is that most central bankers and supervisors today say that climate change will have a major impact on financial stability and will threaten financial stability. But at the same time, we’re not seeing anything drastic being done. 

The second paradox is that the one action that’s being taken when it comes to relating climate change to financial stability or financial instability, is that central bankers are saying “let’s measure it.” Let’s quantify the impact of climate change on financial stability. And then we’ll see what that gives and then we’ll decide what to do. 

But at the same time, all experts, including most central bankers recognize that the task of quantifying the impact of climate change on financial stability is somewhere between extremely difficult and impossible.

And the reality is that it is impossible. 

And what we’re saying in the report and it is my utmost conviction that it is just impossible to quantify. And we came to the conclusion that there’s no need to quantify that to act now.. But when I hear things like, okay, this work stream is going to take three to five years, and then we will start thinking about what we do, which will take when, you know, how it works, another three to five years. saying, okay, maybe you’re going to start acting 10 years from now.

And we say you have no choice. You have to act today or decide that you don’t want to act, which is another discussion. But if you want to act you have to act today. 

And the other dimension is that we got the conviction that the risk represented by climate change for financial institutions, if it cannot be quantified, it can be assessed qualitatively.

Um, so there’s something called prudential regulation that banks have to abide by that sets the capital requirements for banks.

In other words, tell banks, this is how much capital you have to issue. In order to cover the risk because obviously banks are in the business of taking risks to finance the economy. And when you provide finance to the economy, you take risks, it’s the nature of the business. As risk can materialize, you have to have sufficient capital to be able to withstand potential losses without going bankrupt. 

Denise: Can I interrupt you to ask what that looks like. When you say you have to issue a certain amount of capital, what is that physically?

Thierry: Well physically, I don’t want to get into an accounting debate. But if you take the balance sheet of a bank equal at 100, banks have to issue and I’m making a much more complex story short, but the concept is that they have to issue at least eight of capital. If they have a 100 total balance sheet of, of 100, so they will have 92 of debt, and eight of capital to finance themselves because at the end of the day, the bank is also a company and a company has to raise finance to do its job, this is particularly obvious for for a bank.

So the question is how much capital, how much equity, how much shares must banks issue in order to have sufficient capital i.e. the sorts of finance  able to absorb the losses, because that’s what we’re talking about.

Obviously as, as financial, as well as all institutions, as all companies are judged by something called their return on equity. In other words, the profits divided by the amount of capital they have. The more capital they have, the smaller the return on equity because you divide the same number by a bigger number, so the denominator is bigger.

Banks will have a tendency to like to have as little equity as possible because if you divide by a smaller number, the result is bigger. Hence here’s always a tension in these debates because of that reason.  

Denise: One thing I really appreciate about the report is you saying that the current emphasis on disclosure and measurement, uh, which I think if I’m reading you correctly, you’re saying, well, we can’t quantify the risks. So, um, we would just measure things that we can measure and that should lead to market signals, which will solve the problem.

You’re saying this is insufficient, uh, and, and we need to take action through regulatory change. Um, but, but with a mindset of uncertainty, not quite knowing how to calibrate that, that change, is it correct?

Thierry: It is correct. And our answer is that disclosure and transparency is very important, but it’s not sufficient. 

It is not in the nature of private interests to look after the public interest. And this is very much a Finance Watch logic. Don’t ask private actors to work in the public interest.

I mean, we, human beings all work for what we are hired to do, what we get paid for, and we all have a mission. If you’re in a business, your mission is to develop that business and that’s fair enough. That’s no problem with that, but that doesn’t mean that the public interest is just the sum of all private interests.

And if you only count on transparency and disclosure, it comes down to, when you think about it, almost philosophically, as if you were saying, hey, the public interest will be taken into account or be taken care of just because all the private interests will be understanding what’s going on.

And this is not true. This is not true. And therefore you need hard regulation to address the issue. When you look at the way the finance industry and the banking industry is working today. Effectively all the big banks or the big asset managers are both at the same time, the biggest providers of green finance and of brown finance, and obviously biasing green or brown, I’m taking a shortcut, but we know what we’re talking about.

And why is that? Well, because they are in the business of providing capital to projects that make sense, so it can be green, it can be brown and they do the same thing at the same time. So the paradox is from the outside, sometimes you think: why is this bank, you know, doing such good work. And a lot of them do significantly good work on developing sustainable finance, green finance, and there’s a lot of work to be done on that. And at the same time, providing finance and capital to the brownest part of the economy. And obviously the fossil fuel industry is the source of everything.

And the answer to, “Oh, why are they doing that?” And the answer is very simple. Well, the answer is, it is not in their nature to turn business down. If there is business to be done, they will do it. Hence the need for regulation.

Denise: Okay. I want to get into the main recommendation of the report. Which advocates increasing these risk weightings banks must apply to fossil fuel exposure from a hundred percent to 150%, thereby putting that exposure on the same risk footing as venture capital and private equity. You mentioned just now, there’s a sort of a philosophical element to this. My understanding is that you’re basically trying to counteract a dominant view in the industry, which says we fund the world as it is, to something like, banks can change the world by lending differently.

Thierry: Yes. That’s clearly a dimension. And that’s the essential of, of this report is that we should be looking at this issue from a risk standpoint. 

Because prudential regulation as the name indicates is about assessing the risk and making sure that financial institutions will be up and running, will be standing when the crisis strikes, you know, strong and calm, they will not sink. This is what prudential regulation is about. 

And we realized looking at the regulation that the risk weight being applied to fossil fuel exposures in the current banking prudential regulation is not coherent. It’s not consistent with the rest of the regulation. Why is that? Because the standard risk weight, which is what I just defined is one or 100%, same thing. Okay. We look into the regulation and we see an article – number of that article doesn’t really matter, its 128 but it doesn’t matter – that says, well, if a particular asset or particular exposure to that asset is more risky than other exposures. If it’s particularly risky, if it’s uncertain and you mentioned private equity, as one of the examples of something uncertain and considered as risky by the regulation, then you should apply a risk weight of not 100% percent, which is your standard risk weight, but 150%.

And we’re asking ourselves, isn’t the exposure to fossil fuel business more risky than your normal economic activity? And our answer is it is not coherent to have a special article in the financial regulation on prudential regulation, that deals with assets that are especially risky and not to include fossil fuel exposures in that category. It strikes us as particularly incoherent and you can see that this is a qualitative approach. 

As in please make the regulation coherent, as opposed to let’s spend, you know, um, three years trying to work out what is not possible to work out. 

Um, so this is, this is a first response, and then we say this is true for the existing exposures to fossil fuel. Um, and by the way, over the past 10 days, you’ve had companies like BP and Shell announcing write-offs of respectively 17 and $22 billion because basically of falling prices and stranded assets you know, logic.

In this context saying that, you know, exposure to fossil fuel is not particularly risky, is, I find, a very difficult position to take.

What we’re saying in the report as well, is that this is true for existing fossil fuel reserves and therefore for banks, you know, exposures to, to fossil fuel reserves.

But then we think about new fossil fuel reserves because we have to bear in mind that fossil fuel industry is still exploring for new reserves and to extract more reserve from the ground and burn more coal gas, and oil, and therefore emit even more CO2 and we think that, and we say that, by doing that by going for more, looking for, exploring for more and then exploiting that more in the future, effectively, what’s happening is that they are participating in the acceleration of climate change. It is really as if you’re running on the road, you see there’s a brick wall on the road and instead of breaking, you’re accelerating.

So what we’re saying in the report is that if you were so certain that a) from a macroprudential standpoint, this is feeding tomorrow’s disaster and that the impact will be that the amount of money committed or the money committed will be lost, then you have to fund all this for the bank out of equity, as opposed to out of debt. 

In other words, you must raise equity before you provide the financing to those new facilities or new reserves or exploration for new reserves. Because as we said, equity is the financial instrument that can bear losses. By definition equity absorbs losses. So if you’re doing something extremely risky, please do it out of equity and not out of debt.

That’s so this is really the logic of what we do. 

And that explains also the title of the report Breaking the climate-finance doom loop. And that doom loop is very simply the vicious circle that I just described, in which fossil fuel finance enables climate change and climate change threatens financial stability.

So that’s, that’s really the doom loop move and that’s the doom loop, that’s a vicious circle that needs to be broken.

Denise: I’m guessing that the launch of the report in the current context of the chaos and volatility in the oil markets and the sector generally has been probably favorable to the uptake of your report.

Have you been surprised by anything concerning the impact of your report and how the response has been?

Thierry: Response so far has been interesting when thought about it. Um, I have to say I’m very pleased about the overwhelming reaction of saying, “Well, at last that’s something we’re being offered, something that we can activate. There’s something that can be done.”

Because so often you have reports or analysis saying, Oh, we have a big problem, but yes, and so what? 

What we’re trying to do is say, okay, we have a big problem, it is very serious and something can be done. Moreover that something is not from an institutional standpoint and a political standpoint, it’s not that difficult. 

You don’t have to change the treaties. You don’t have to do something  to change the structure. of whatever difficult legislation. You just have to amend two little articles in an existing regulation. So basically we’ve shown that and we’re showing, and I haven’t received any contradictions so far from someone telling me it doesn’t work like that.

But what we’re showing is that you just have to amend those two articles, the job will be done. And this is just in other words, a question of political will. It’s not a question of, it’s not feasible. 

Um, and the reaction to the report, we’ve discussed it with quite a number of people already, has been: “Hmm. We have to think about it.” And obviously those things take a little bit of time, but, uh, but we’re not going to stop. So we’ll see what that is.

Denise: If your recommendations become a reality, um, what do you think the impact would be is, is the idea just to slow down brown lending or for it to really just, uh, accelerate, um, you know, just bring it to a halt all of a sudden.

Thierry: I’ve had a few discussions with some bank lobbies who were telling me, Oh, you’re trying to penalize banks. And you’re trying to, to, to orient capital away from something that everybody needs and everything.

And I’m saying this is not true whatsoever. First of all, because with a risk approach and not a policy approach, and this is very important. 

Effectively, what regulation is doing is incentivizing something on the basis of underestimating the actual risk. Because obviously the higher the risk weight, the less incentive there is for the bank to provide the lending. So either they say, okay, I’ll continue doing it, but I will reflect the actual risk in the price of my lending. Yes, they will diminish or perhaps stop. But at the very least, you know, the actual risk will be taken into account. 

Um, but at least when climate change strikes, banks will not fail because of that. Because when you think about it, climate change is going to be bad enough. But if on top of that, you have a banking system that fails globally as it did 12 years ago, you will combine a horrible financial crisis on top of the environmental crisis.

Denise: I’d like to wrap up with a broader question about the issue of the relationship between finance and democracy. Part of Finance Watch’s mission is contribute to a plural inclusive democracy in which citizens’ voices are not drowned out by lobbies and powerful private actors.

I wanted to ask just from my own standpoint as an EU citizen, who has an interest in such subjects, but sees everything that goes on in Brussels as overly legalistic and impossible to understand, how can I have skin in the game and how can I make my voice heard in this debate?

Thierry: When you think about what we’re asking – high level European commission and officials to do and governments to do. Technically it’s a little bit technical. But we just went through that, it’s not that difficult. 

Politically those people are going to need support and people can get involved in that.

Because politicians, that’s the nature of democracy and elected officials, follow the voice of the people. If the voice of the people say, you have to do this, they will do it. If the voice of the people, you know, say nothing, it’s doubtful that they will do it. 

So we, as technicians, you know, sitting in Brussels cannot do everything. We need the support of the citizens. 

We’re actually preparing at the moment on the very topic we discussed today on the link between climate change and financial stability, we’re preparing a citizens campaign that should be launched in the autumn to get people to get involved in this and to support us and to ask their governments. Because, you know, if we don’t build that pressure then nothing will happen. 

And this is what making financial society is about. You know, we need finance but we need it to serve society. 

Denise: This has been a fascinating conversation. I’ve learned a lot. And, uh, thank you. Thank you, Terry. Thank you for your time. It was a pleasure having you on the show.

Thierry: Thank you, Denise. My pleasure.

Denise: That’s it for this episode, thanks for listening to New Climate Capitalism.

If you’d like to get involved with FinanceWatch, follow them on Twitter @forfinancewatch. To learn more about the climate-finance doom loop report, check out the resources tab for this episode at climatenarratives.co.

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Many thanks to Valentine Scherer and Victoria Yates for their help producing this episode, and to Lucas Laufen for the theme music.

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