since adoption 2015 Paris climate agreement, global banking regulators have focused on managing the risks of climate change. These risks suggest that changes in government policies, legal provisions, technology or market demand may make fossil fuel or renewable energy technologies more or less valuable.
But regulators have often presented these risks in a one-way manner, arguing that green investments reduce risk. And it focuses on the possibility of banks incurring losses when financing fossil fuel projects if policies aimed at reducing carbon emissions are implemented. For example, if a bank finances a project that relies on fossil fuels and its value declines as a result of a carbon tax, the bank could suffer losses.
Initiatives such as Science-Based Goals Initiative It assumes that risks only arise when banks do not move from fossil fuel financing to clean energy projects.
Neglected risks in renewable energy
In contrast, the risks associated with financing renewable energy projects have been ignored. If a bank finances a green energy project, and then the project loses value as a result of the cancelation of government subsidies, the bank may also incur losses. Thus, the risks of transformation are not one-sided, but two-way.
And Bank Policy Institute research has repeatedly warned that risks include both types of investments, noting that the assumption that a shift is going in one direction could lead to wrong financial decisions and potential losses.
Electric Vehicle Market Transitions
Recent data suggest that the growth of electric vehicle sales is slowing globally. After strong growth in 2025, this growth is expected to decline in 2026, especially in Europe and North America.
And this slowdown is linked to several factors, including:
- Reducing tax incentives
- Decreased government support
- Weak demand in some markets
Major companies such as Ford andGeneral Motors andStylants Huge losses in the electric vehicle sector, with cumulative losses of about $140 billion between 2022 and 2025, with an average loss of $25,000 per vehicle.
Challenges of the Solar Energy Sector
While solar energy continues to grow globally, the sector is facing financial pressures. In the United States, the market experienced about 125 bankruptcies of solar energy companies between 2021 and 2024, as a result of:
- Rising interest rates
- labor shortage
- Policy changes
The adjustment of California’s incentive system reduced returns by as much as 75%, reducing the attractiveness of investment.
faithful Spain, the rapid expansion of solar power production has pushed prices down to zero or sometimes negative levels, causing asset values to plummet and increasing pressure on companies.
Implications for the banking sector
These developments show that investing in renewable energy is not risk-free, even as the sector continues to grow. Political or market changes can lead to losses, both in traditional and green projects.
Regulators' reliance on scenarios that assume a single direction of transformation may lead to:
- Stimulation of the results of pressure tests
- Reducing the diversity of portfolios
- Undervaluing the real risks
conclusion
Recent experience confirms that the risks of climate change are complex and multidirectional. While green investments can make gains, they can also suffer losses due to policy changes or market conditions.
Therefore, banks should:
- Evaluate each project independently
- Avoid simplistic assumptions
- Adopt multi-directional scenarios
Regulators should also develop more realistic models that take into account the potential for policy and economic trends to change, ensuring the long-term stability of the financial system.
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