Those capital requirements, where capital mostly signifies bank equity, decree more credit risk more capital – less credit risk less capital. That might sound logical, but it is not!
That means that banks are allowed to leverage more their equity (and the various sort of support they receive from taxpayers) when lending to what is perceive as safe than when lending to what is perceived as risky; which means banks can earn higher risk-adjusted returns on equity when lending to The Safe than when lending to The Risky; and which makes it impossible for banks to treat all borrowers fairly.
Motorcycles are much riskier than cars, but much more people die when going in cars than when riding motorcycles.
If we do not want banks to take risks in order to create jobs, in order to reduce poverty and in order to help the sustainability of earth… then what the hell do we want banks for… safe mattresses would do.
I am not much for distorting credit allocation in any way, I believe it is way too arrogant for us to pretend we know how, but, if we have to do it, I would much prefer allowing banks to hold a bit less capital when lending to something related to the SDGs, so that they make a bit more return on equity when lending to the SDGs, so that they lend a bit more to the SDGs.