The current EU banking regulatory framework is disproportionately costly for smaller, non-complex, ESG-focused financial institutions that are best positioned to deliver on climate goals. These Ethical and Sustainable Banks operate with values such as transparency, community participation, efficiency, and sobriety. They have clear exclusion criteria for environmental and social harm, do not finance fossil fuels, and disclose the organizations they finance. However, the existing EU banking system favors larger institutions and undermines the competitiveness of smaller ethical banks. To level the playing field, the prudential framework should recognize the societal role of smaller sustainable banks and introduce an ESG supporting factor for ethical and sustainable assets.

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