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### Introduction — context and motivation
- COVID pandemic illustrated large direct impact of human activity on the atmosphere and indirect impact on climate change; emissions rebounded rapidly after lockdowns.
- Permanent emissions reductions require transitioning industrial and residential sectors to low-carbon-emitting technologies.
- COP26 (Glasgow, 2021) reaffirmed Paris Agreement (2015) commitments to keep global temperature rise well below 2 degrees Celsius and pursue efforts to limit to 1.5 degrees Celsius.
- Glasgow Climate Pact signatories committed to publish updated plans to cut greenhouse gas emissions by 45 per cent by 2030 and to contribute to the net-zero goal by 2050.
- Estimates of investment needs to achieve net-zero are large and uncertain:
  - McKinsey (2022): about 275 trillion U.S. dollars in cumulative spending, or approximately 9.2 trillion dollars per year, over the next three decades, to achieve net-zero by 2050.
  - McKinsey (2020): investment needs in the European Union estimated at 28 trillion euros.
- Paper proposes launching a secondary market for brown assets (securitization of banks' exposures to carbon intensive activities) to:
  - Mitigate risks from elevated stranded assets and increase banks’ available capital to extend credit for greening the economy.
  - Provide better risk-return opportunities to dedicated green investors and potentially increase financing available for the energy transition.

### Trends and challenges for green finance
- Recent public-sector role and private-sector imperative:
  - Public sector expected to play a key role; many countries increasing public investment in clean energy and infrastructure.
  - Private sector and financial sector must provide the bulk of required resources.
- Market growth and scale (Europe, 2021):
  - Green bond issuance volume increased by 90 per cent from 2020 to reach 252 billion euros.
  - Green bonds constituted about 11 per cent of total European bond issuance.
  - Total outstanding volume of green bonds at end of 2021 reached about 700 billion euros.
  - Green securitization market issuance in 2021: about 4.5 billion euros.
  - Green-linked bond and loan issuance volumes in 2021 amounted to about 450 billion euros, described as "only a half of the annual investment needs to achieve carbon neutrality by 2050 in Europe."
- Banks and greening constraints (EBA pilot findings):
  - Only 25 per cent of total submitted notional exposure covered by the EU taxonomy identified as green.
  - Green asset ratio estimated at just 7.9 per cent.
  - More than half of banks’ exposures (58% of total non-SME corporate exposures to EU obligors) allocated to sectors that might be sensitive to transition risks.
- Policy trade-offs and stranded assets:
  - Some climate policies may increase costs and reduce private capital supply for green projects; sharp increases in carbon prices could raise defaults for high-carbon firms and impair banks' credit quality.
  - Narrow focus on green economy policies may accelerate depreciation of brown assets and lead to stranded assets.

### Supply-side case for a secondary market (model and simulation)
- Objective: allow banks to stop rolling over brown exposures and invest proceeds into green projects (passive rebalancing) and to securitize and sell brown assets on a secondary market (active rebalancing).
- Definitions and baseline inputs:
  - Green exposures aligned with the EU taxonomy as applied in the EBA pilot; all other exposures considered brown.
  - Variables and parameters used in stylized laws of motion:
    - B(t) and G(t): total brown and green exposures.
    - r: yield, assumed equal for brown and green and set to the return on financial assets from the EBA Risk Dashboard (September 2021).
    - δ: amortization rate of brown assets, proxied by the quarterly growth rate of net loans to non-financial corporations in the euro area (average 2018-2021).
    - s: share of brown assets disposed on the market (active rebalancing).
- Passive rebalancing equations:
  - B(t) = B(t-1) * (1+r-δ)
  - G(t) = G(t-1) * (1+r) + δ*B(t-1)
- Active rebalancing equations:
  - B(t) = B(t-1) * (1+r-δ- s)
  - G(t) = G(t-1) * (1+r) + (δ+s) * B(t-1)
- Simulation assumptions and initial conditions:
  - Initial green asset ratio set to 7.9 per cent (from EBA exercise).
  - Returns for brown and green assets assumed constant and equal.
  - Banks might dispose 10 per cent of total brown exposures on an annual basis (based on Italian NPL experience average share sold 2006–2014).
  - Alternative gradual path for s: from 2 per cent to 10 per cent over time.
- Key simulation results — time to reach 50% green asset share:
  - Passive rebalancing: about 40 years to increase green assets ratio from 7.9 per cent to 50 per cent.
  - Active rebalancing with constant s = 10 per cent: rebalancing time cut to about 6 to 7 years.
  - Active rebalancing with s increasing gradually from 2 per cent to 10 per cent: rebalancing time about 8 years.
- Interpretation:
  - A secondary market for brown assets could materially accelerate greening of banks’ balance sheets and increase resources to finance the transition.
  - New instruments backed by brown assets are intended to support phase-out of existing brown capital stock and replacement with green capital, not to provide fresh financing to brown activities.

### Demand-side case for brown-asset securitization (B-ABS) and market dynamics
- Description of B-ABS:
  - Securitized brown assets (B-ABS) are hybrid instruments linked to carbon-intensive assets that do not finance new carbon-intensive projects but aim to facilitate the transition by expanding opportunities to share transition financial risks among a broader pool of investors.
  - B-ABS intended to allow dedicated green investors to support the transition indirectly in addition to financing green projects directly.
- Green bond market characteristics (2021 data and patterns):
  - Issuers include supranational organizations, sovereigns, corporations; private sector issuers: financials (mainly banks and REITs) and non-financial corporations (renewable energy, utilities, manufacturing).
  - Sectoral focus: energy, transport, and buildings contributed 81% to total issuance in 2021 (Climate Bonds Initiative).
  - Common practice: green bonds typically used for refinancing rather than financing new green assets.
  - Verification gap and greenwashing risk: no consistent auditing or compulsory verification across countries.
- Demand indicators:
  - Total assets of funds with an ESG mandate exceeded 6 trillion U.S. dollars in 2021 (AFME, 2021).
  - Fixed income funds account for 22 per cent of the total ESG funds.
  - Survey among issuers: 66 per cent of deals were allocated to investors describing themselves as green or socially responsible.
- The "greenium" evidence:
  - Mixed empirical findings on negative pricing premium for green bonds:
    - Zerbib (2019): small negative premium overall; more pronounced for financial and low-rated bonds.
    - Ehlers and Packer (2017): negative premium in the primary but not secondary market.
    - Larcker and Watts (2020): identical pricing in the US municipal securities market.
    - Liberati and Marinelli (2021): strong evidence of the greenium and its increase following the Covid-19 shock.
    - Yousaf et al. (2022): green bonds served as the only asset safe haven during COVID-19 large stock market fluctuations and produced the highest risk-adjusted returns in the sample.
    - Tang and Zhang (2018): stock prices and liquidity improve after issuance of green bonds.
    - Scatigna et al. (2021): positive relationship between carbon content and firms’ funding costs; higher carbon footprint firms’ debt trades at marginally higher yields.
  - Regulatory context: continued demand outstripping supply expected in the medium term; reference to Regulation (EU) 2019/20881, Sustainable Finance Disclosures Regulation - SFDR.
  - Trade-off: narrower mandates for green funds reduce diversification and may offer an inferior Sharpe ratio; potential hard limit to growth of specialized green asset management if performance gaps persist.
- Efficient frontier insights and role of B-ABS:
  - Restricting investments to green securities shifts the efficient frontier inward (lower expected returns for any accepted level of risk).
  - Adding B-ABS to green securities can produce an intermediate frontier that lies between the green-only and market frontiers, potentially improving risk-return profiles for green-constrained investors.
  - This outward shift assumes green investors will buy B-ABS; disclosure and communication of transition benefits are key.
- Transition scenario:
  - In a benign transition, brownfield brown assets continue to generate positive returns until converted or replaced, minimizing transition costs through broader risk sharing and increasing funding available for the green economy.

### Policy lessons, analogies to the European NPL market, and simulation of policy support
- Preconditions for market development:
  - Well-defined climate policies with clear objectives, measures, timelines, and regulatory frameworks for financial risks facilitate launching a secondary market for brown assets.
  - Price discovery and valuation are critical; market take-off may be slow while participants build valuation models.
- Lessons from European NPL market experience (Italy and Greece examples):
  - Italy: reforms of debt enforcement and insolvency regimes; tax treatment of loan losses and write-downs (Deferred Tax Assets - DTA) modified; reform of securitization law (D.L. n. 50/2017 amending L. n. 130/1999); government guarantee scheme GACs (2016) for most senior tranche contingent on investment-grade rating.
  - Greece: HAPS (2019) similar scheme.
  - Impact: Italian GACS accounted for over half of all NPL exposures securitized in Europe between 2017 and 2021; Greek HAPS accounted for another 25 per cent.
  - Regulatory treatment: Basel III revisions for securitization exposures with special provisions for NPL securitizations (BCBS, 2020); EU amendments: Securitisation Regulation (EU 2021/557), Capital Requirement Regulation (EU 2021/558), NPL Secondary Markets Directive (EU 2021/2167).
- Policy-design caveat:
  - Measures that mitigate banks’ losses when offloading brown assets must be carefully designed to ensure consistency with accelerating the green transition while safeguarding public debt sustainability and avoiding undue climate-related contingent liabilities.
- Policy simulation outcomes (NPL-based analogies):
  - Historical NPL sales in Italy:
    - 2014: Italian banks sold 30 per cent of their NPL, up from an average share of 10 per cent over the period since 2006.
    - Following supportive measures mid-2015 to 2017: share of NPL sold rose to an average of about 50 per cent, a registered increase of 67 per cent from 2014.
  - Simulation assuming policy measures “equivalent” to those used for NPL:
    - Average share of brown assets disposed in the secondary market rises from 10 to 17 per cent.
    - Result: halving the target rebalancing time for greening banks’ balance sheets to 4 years.
  - Interpretation caveats:
    - Conditions that justified strong NPL-supporting measures differed materially from the context for brown asset market support.
    - NPL policy goal was to reduce elevated NPL ratios after the GFC; green asset goal is to raise greenness of banks’ exposures from about 8 per cent to a conservatively assumed 50 per cent target.
    - Greenness is heterogeneous across banks; those more exposed to brown assets need more time to rebalance.
  - Policy implication: targeted policies can materially affect market development, but careful calibration is required; a case exists for a secondary market beyond a very short horizon even with forceful measures.

### Caveats, data limitations, and lifecycle considerations
- Simplifying assumption in analysis: all non-green exposures treated as brown; ongoing taxonomy work will allow more granular categorization.
- Policy support could be temporary and phased out as the market for brown assets vanishes when the economy approaches carbon neutrality; support could be designed with sunset clauses or market-pricing triggers.
- Final assessment: lessons from NPL markets indicate well-designed policies can support market development, but design must ensure alignment with accelerating the green transition while protecting fiscal and financial stability.

### Conclusions — synthesis and policy-relevant takeaways
- Main finding: B-ABS can mobilize private capital for the green transition by transferring brown assets from banks’ balance sheets to portfolios of dedicated green investors, freeing risk-based capital for new green investments and expanding investment opportunities for green asset managers.
- Mechanisms delivering benefits:
  - Greater risk sharing among market participants.
  - Risk reduction through diversification.
- Conditions and enablers:
  - Leveraging supply and demand factors together with targeted policy support can make a market for brown assets possible.
  - Experience of the NPL market demonstrates targeted policies can play a decisive role in fostering market development.
- Ongoing taxonomy work:
  - EU taxonomy currently defines green activities for climate mitigation and adaptation.
  - Platform on sustainable finance is working on possible approaches for defining negative impact economic activities (‘brown taxonomy’) and no impact activities (‘neutral activities’); work is at an early stage and would provide a fuller categorization of economic activities from an environmental perspective.

*IMF Working Paper — "A market for brown assets to make finance green"*

### 1.    Introduction .....................................................................................................

### 1. Introduction

### Key points
- The COVID pandemic showed the large direct impact of human activity on the atmosphere and indirect impact on climate change; emissions rebounded rapidly after lockdowns.
- Permanent emissions reductions require transitioning industrial and residential sectors to low-carbon-emitting technologies.
- COP26 (Glasgow, 2021) reaffirmed commitments in the Paris Agreement (2015) to keep global temperature rise well below 2 degrees Celsius and pursue efforts to limit to 1.5 degrees Celsius.
- Glasgow Climate Pact signatories committed to publish updated plans to cut greenhouse gas emissions by 45 per cent by 2030 and to contribute to the net-zero goal by 2050.
- Estimates of investment needs to achieve net-zero are large and uncertain:
  - McKinsey (2022): about 275 trillion U.S. dollars in cumulative spending, or approximately 9.2 trillion dollars per year, over the next three decades, to achieve net-zero by 2050.
  - McKinsey (2020): investment needs in the European Union estimated at 28 trillion euros.
- Paper proposes launching a secondary market for brown assets resulting from securitization of banks' exposures to carbon intensive activities to:
  - Mitigate risks from elevated stranded assets and increase banks’ available capital to extend credit for greening the economy.
  - Provide better risk-return opportunities to dedicated green investors and potentially increase financing available for the energy transition.

*IMF Working Paper — A market for brown assets to make finance green*

---

### 2. Trends and challenges for green finance

### Recent developments
- Public sector expected to play a key role in the green transition; many countries increasing public investment in clean energy and infrastructure.
- In Europe, the majority share of national Recovery and Resilience Plans, supported by NextGenerationEU, will be spent to accelerate the green transition.
- Private sector and financial sector must provide the bulk of required resources.

### Market growth and scale
- Green bond issuance volume in Europe increased by 90 per cent from 2020 to reach 252 billion euros in 2021.
- In 2021, green bonds constituted about 11 per cent of total European bond issuance.
- Total outstanding volume of green bonds at end of 2021 reached about 700 billion euros.
- Green securitization market issuance in 2021: about 4.5 billion euros.
- Green-linked bond and loan issuance volumes in 2021 amounted to about 450 billion euros, described as "only a half of the annual investment needs to achieve carbon neutrality by 2050 in Europe."

### Banks and greening constraints
- Banks remain the main source of external financing for the European private sector and issue green-linked loans, green bonds, and asset-backed securities from green loans.
- EBA pilot exercise findings:
  - Only 25 per cent of total submitted notional exposure covered by the EU taxonomy identified as green.
  - Green asset ratio (proposed EBA primary greenness indicator) estimated at just 7.9 per cent.
  - More than half of banks’ exposures (58% of total non-SME corporate exposures to EU obligors) allocated to sectors that might be sensitive to transition risks.
- Greenwashing risk persists; progress on common taxonomies and disclosure (e.g., EU taxonomy) can help mitigate greenwashing.

### Policy trade-offs and stranded assets
- Some climate policies may increase costs and reduce private capital supply for green projects (example: sharp increase in carbon prices raising defaults for high-carbon firms, impairing banks' credit quality).
- Narrow focus on green economy policies may accelerate depreciation of brown assets and lead to stranded assets.
- Reference to H.-W. Sinn (The green paradox, 2008) on potential perverse effects of certain climate policies.

*IMF Working Paper — A market for brown assets to make finance green*

---

### 3. The case for a secondary market for brown assets: supply-side perspective

### Concept and objective
- Banks expanding green asset portfolios from a low base, constrained by demand for bankable green projects and supply-side capital constraints.
- Proposal: allow banks to stop rolling over brown exposures and invest proceeds into green projects (passive rebalancing), supplemented by an active rebalancing strategy where banks securitize and sell brown assets on a secondary market.
- Definition: green exposures aligned with the EU taxonomy as applied in the EBA pilot; all other exposures considered brown.

### Stylized model (laws of motion)
- Passive rebalancing (no securitization sales):
  - B(t) = B(t-1) * (1+r-δ)
  - G(t) = G(t-1) * (1+r) + δ*B(t-1)
  - Variables:
    - B and G: total brown and green exposures submitted in the EBA climate risk mapping exercise.
    - r: yield, assumed equal for brown and green and set to the return on financial assets from the EBA Risk Dashboard (September 2021).
    - δ: amortization rate of brown assets, proxied by the quarterly growth rate of net loans to non-financial corporations in the euro area (average 2018-2021).
- Active rebalancing (with securitization sales):
  - B(t) = B(t-1) * (1+r-δ- s)
  - G(t) = G(t-1) * (1+r) + (δ+s) * B(t-1)
  - s: share of brown assets disposed on the market.

### Simulation assumptions and initial conditions
- Initial green asset ratio set to 7.9 per cent, computed from EBA exercise.
- Assumption: constant and equal returns for brown and green assets — conservative for time required to green banks’ balance sheets.
- Based on Italian NPL experience, assume banks might dispose 10 per cent of total brown exposures on an annual basis (average share of Italian NPL sold 2006–2014).
- Alternative gradual path for s: from 2 per cent to 10 per cent over time.

### Simulation results — time to reach balanced portfolio (50% green)
- Under passive rebalancing: about 40 years to increase green assets ratio from 7.9 per cent to 50 per cent.
- Under active rebalancing with constant s = 10 per cent: rebalancing time cut to about 6 to 7 years.
- Under active rebalancing with s increasing gradually from 2 per cent to 10 per cent: rebalancing time about 8 years.

### Interpretation
- A secondary market for brown assets could materially accelerate greening of banks’ balance sheets and increase resources to finance the transition.
- New instruments backed by brown assets are intended to support phase-out of existing brown capital stock and replacement with green capital, not to provide fresh financing to brown activities.

*IMF Working Paper — A market for brown assets to make finance green*

### 4.  The case for a secondary market for brown

### 4.  The case for a secondary market for brown assets: a demand-side perspective

### Overview
- Securitized brown assets (brown assets backed securities - B-ABS) are described as hybrid instruments linked to carbon-intensive assets that do not finance new carbon-intensive projects but aim to facilitate the transition to a greener economy by expanding opportunities to share transition financial risks among a broader pool of investors while raising feasible returns.
- B-ABS are positioned as instruments that allow dedicated green investors to support the transition indirectly in addition to financing green projects directly.

### The market for green bonds (4a)
- Issuers: supranational organizations, sovereigns, corporations; private sector issuers include financials (mainly banks and REITs) and non-financial corporations (renewable energy, utilities, manufacturing).
- Key structural characteristic: issuer commits to use proceeds to finance or refinance “green” projects, assets, or business activities.
- Sectoral focus: energy, transport, and buildings (first three categories contributed 81% to the total issuance in 2021 according to Climate Bonds Initiative); followed by water, waste, land use, industry, and ICT.
- Common practice: green bonds are typically used for refinancing rather than financing new green assets.
- Verification gap: across countries there is typically no auditing or compulsory verification of green bond use of proceeds; absence of regulatory framework can create reputational risk and greenwashing risk.
- Demand indicators:
  - Total assets of funds with an ESG mandate exceeded 6 trillion U.S. dollars in 2021 (AFME, 2021).
  - Fixed income funds account now for 22 per cent of the total ESG funds.
  - Survey among issuers: 66 per cent of deals were allocated to investors describing themselves as green or socially responsible.

### The greenium (4b)
- Definition: the “greenium” is the negative spread observed, particularly at issuance, relative to comparable conventional bonds—interpreted either as green investors accepting lower yields for environmental benefit or as excess demand over supply of green bonds.
- Empirical findings are mixed:
  - Zerbib (2019): small negative premium overall; more pronounced for financial and low-rated bonds.
  - Ehlers and Packer (2017): negative premium in the primary but not secondary market.
  - Larcker and Watts (2020): identical pricing in the US municipal securities market.
  - Liberati and Marinelli (2021): strong evidence of the greenium and its increase following the Covid-19 shock.
  - Yousaf et al. (2022): green bonds served as the only asset safe haven during COVID-19 large stock market fluctuations; supplementing stock portfolios with green bonds during COVID-19 resulted in the highest risk-adjusted returns compared to other alternative assets in the sample.
  - Tang and Zhang (2018): stock prices and liquidity improve after issuance of green bonds.
  - Scatigna et al. (2021): positive relationship between carbon content of business activities and firms’ funding costs; higher carbon footprint firms’ debt trades at marginally higher yields.
- Regulatory context: expected continued demand outstripping supply in the medium term; EU Regulation reference: Regulation (EU) 2019/20881, Sustainable Finance Disclosures Regulation - SFDR.
- Trade-off for green funds: narrower mandates reduce diversification and may offer an inferior Sharpe ratio compared to less constrained funds; potential hard limit to growth of specialized green asset management if performance gap becomes too large.

### Efficient frontier illustration and the role of B-ABS
- Method: hypothetical efficient frontier constructed using historical pricing data of all individual components of the Dow Jones Industrial Average (DJA); alternative frontiers using subsets of the DJA illustrate constrained green-only investment sets.
- Key graphical insights (figure 3 narrative):
  - Black frontier (“market”): optimal portfolios for an unconstrained investor.
  - Green frontier: restricting investments to green securities shifts the frontier inward—green fund managers can offer lower expected returns for any accepted level of risk.
  - Adding B-ABS (blue stars) to green securities can produce an intermediate (dotted blue) frontier that lies between the green and market frontiers, shifting outward relative to the green-only frontier.
- Assumption and implication: outward shift from adding B-ABS assumes green investors will be willing to buy B-ABS; disclosure and communication of potential benefits of a gradual transition will be key.
- Transition scenario: in the most benign scenario, brownfield brown assets continue to generate positive returns during the transition until converted or replaced by green assets, minimizing transition costs through broader risk sharing and increasing funding available for the green economy.

### Policy role and lessons from the European NPL market (section 5 and 5a)
- General point: well-defined climate policies with clear objectives, measures, timelines, and regulatory frameworks for financial risks from climate change set favorable conditions for launching a secondary market for brown assets.
- Price discovery and valuation: correct pricing of B-ABS is critical; market take-off may be slow as banks, SPVs, and investors build valuation models.
- Targeted policies can play a supportive role, as illustrated by the European market for non-performing loans (NPL):
  - Background: securitization of NPL predates the GFC, but post-GFC rise in NPL renewed interest; securitization and direct sales helped reduce bank NPLs.
  - Italy measures: reforms of debt enforcement and insolvency regimes; tax treatment of loan losses and write-downs modified (Deferred Tax Assets - DTA); reform of securitization law (D.L. n. 50/2017 amending L. n. 130/1999); government guarantee scheme GACs (2016) for the most senior tranche contingent on investment-grade rating, sale of majority of junior tranches to private investors, guarantee remunerated at market price.
  - Greece: similar scheme HAPS (2019).
  - Impact: Italian GACS accounted for over half of all NPL exposures securitized in Europe between 2017 and 2021; Greek HAPS accounted for another 25 per cent.
  - Regulatory treatment: Basel III introduced revised framework for securitization exposures with special provisions for NPL securitizations (BCBS, 2020); EU amendments: Securitisation Regulation (EU 2021/557), Capital Requirement Regulation (EU 2021/558), NPL Secondary Markets Directive (EU 2021/2167).
- Policy design caveat: measures that mitigate banks’ losses during offloading of brown assets (e.g., tax measures) must be carefully designed to ensure consistency with accelerating the green transition while safeguarding public debt sustainability and avoiding undue climate-related contingent liabilities.

### Policy simulation and quantitative impacts (5b)
- Historical NPL sales in Italy:
  - 2014: Italian banks sold 30 per cent of their NPL, up from an average share of 10 per cent over the period since 2006.
  - Following supportive measures mid-2015 to 2017: share of NPL sold rose to an average of about 50 per cent, a registered increase of 67 per cent from 2014.
- Simulation for brown assets assuming policy measures “equivalent” to those used for NPL:
  - Average share of brown assets disposed in the secondary market rises from 10 to 17 per cent.
  - Result: halving the target rebalancing time for greening banks’ balance sheets to 4 years.
- Interpretation caveats:
  - Conditions that justified strong NPL-supporting measures differed materially from the context for brown asset market support.
  - NPL policy goal: reduce elevated NPL ratios after the GFC; measures succeeded in bringing average NPL ratio to single digit.
  - Green asset goal in simulation: raise greenness of banks exposures from current low level estimated at just about 8 per cent (green asset ratio from the EBA exercise) with a conservatively assumed initial rebalancing goal of 50 per cent of banks’ assets.
  - Starting point and target differ from NPL case; greenness is heterogeneous across banks—those more exposed to brown assets need more time to rebalance.
- Policy implication: there is a case for a secondary market for brown assets beyond an extremely short horizon even if forceful policy measures are used; targeted policies can materially affect market development but require careful calibration.

### Caveats, data limitations, and lifecycle of the market
- Simplification in analysis: assumption that all non-green exposures of banks are brown—ongoing work to improve environmental taxonomy will allow more granular analysis.
- Temporary/support design: policy support could be temporary, reflecting the expected life of the market for brown assets; as activities become sustainable and the economy approaches carbon neutrality, the market for brown assets is expected to vanish and support measures would naturally cease to be used if market-pricing based or be accompanied by sunset clauses.
- Final assessment: lessons from the secondary market for NPL indicate well-designed policies can support market development, but design must ensure alignment with the primary objective of accelerating the green transition while protecting fiscal and financial stability.

*Source: IMF Working Paper — "A market for brown assets to make finance green" (section 4 and 5 excerpts).*

### 6.  Conclusions

### 6.  Conclusions

### Main finding: B-ABS can mobilize private capital for the green transition
- Transferring brown assets from banks’ balance sheets to the portfolios of dedicated green investors can help raise private capital to finance the transition to a carbon neutral economy.
- On the supply side, the proposed market for brown assets (the B-ABS) may allow banks to offload part of their brown exposures and free risk-based capital that could be used to finance new green investments.
- On the demand side, the new market could expand the investment opportunities available to green asset managers beyond the constraints mandated by environmentally conscious investors, enabling green asset managers to offer superior risk-return profiles and attract more resources.

### Mechanisms delivering benefits
- Potential benefits stem from greater risk sharing among market participants.
- Risk reduction through diversification is another channel through which the market for brown assets can improve outcomes.

### Conditions and enablers for market development
- Creating a market for brown assets could be possible by leveraging supply and demand factors, reinforced by global efforts toward the green economy transition.
- The experience of the market for NPL demonstrates that targeted policies can play a decisive role in fostering market development.

### Ongoing taxonomy work
- The EU taxonomy is currently limited to defining green activities considered as environmentally sustainable from the perspective of the objectives of climate change mitigation and adaptation.
- Ongoing work by the platform on sustainable finance, established by the European Commission, aims to propose a possible approach for defining negative impact economic activities (‘brown taxonomy’) and no impact activities (‘neutral activities’).
- While this work is in an early stage, it would eventually provide a complete categorization of the full spectrum of economic activities from an environmental perspective.

*IMF Working Paper — "A market for brown assets to make finance green", Conclusions section*

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_Source: https://www.imf.org/-/media/files/publications/wp/2023/english/wpiea2023011-print-pdf.pdf_