Though the idea is not new, banks increasingly fancy their chances given the growing public appetite to see climate change tackled. However, not only do banks face a long legislative path, but they are up against opposition, ironically from some green party politicians. 

A supporting factor is a reduction in the capital that a bank must set aside against a loan as a security in case it defaults and the EU already allows this for small business loans to encourage credit to flow to that sector. 

“There is a new momentum to incentivise,” says Denisa Avermaete, a senior adviser at the European Banking Federation (EBF), reflecting on the new legislative cycle and the European green deal - the EU’s sustainable economy plan. 

The EBF is publishing a paper on incentives for sustainable finance, which Ms Avermaete hopes will stimulate a debate on how to boost the sector. The EBF is looking to up the tempo as on the current timetable the green supporting factor won’t go live until the late 2020s.  

However, some suspect that bank enthusiasm for a green supporting factor is simply a cynical ploy to lower capital requirements to boost profits. 

"From my perspective, this is purely lobby-driven bad financial regulation," says Sven Giegold, a German member of the European Parliament, who is part of the group of greens and the European free alliance. "We were consistently of that view because we do not like that the hard won increase in capital requirements after the crisis are watered down, which were not that big anyway."

Michael McKee, a partner at international law firm DLA Piper, worries that if the supporting factor is not properly calibrated it risks creating a green bubble in a similar way that the US government incentivised subprime mortgages, which fuelled the global financial crisis. This was done with the good intention of spurring home ownership in deprived areas. 

Nonetheless, the European Parliament did convince the EU authorities to research the idea further.  

A key sticking point for regulators is the lack of data on the probability of ‘green’ loans defaulting given it is a new area compared with say mortgages or credit card loans. Substantial historical data is needed to gauge the riskiness of a loan type so as to calculate the amount of risk capital that banks should set aside. 

Piers Haben, director of banking markets innovation and consumers at the European Banking Authority (EBA), says the green supporting factor is only one component of a package of regulatory measures around green lending. He explains that risk management and governance, disclosures, scenario analysis and stress testing need to be considered first. This is why EU policy-makers have given the EBA until 2025 to produce its recommendations. 

However, EU policy-makers believe it is difficult to accelerate the timetable unless there is the political will to do so.