Eurozone banks must do more to tackle climate change risks


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European Central Bank urged banks to ‘urgently’ improve plans to protect their businesses from climate change risks after review found widespread gaps in lenders’ approach to environmental challenges .

The ECB, which has directly supervised the euro area’s largest banks for seven years, has completed its first assessment of banks’ readiness to face increased climate and environmental risks. He found that no bank under his supervision came close to meeting the ECB’s expectations. The central bank said lenders could “eventually” face higher capital requirements, as it has incorporated climate risk assessments into its regular work on setting capital levels for individual banks.

According to the assessment, the greatest risks for banks come from exposure to energy companies that do not turn to more sustainable businesses and energy-intensive sectors such as aviation. Other risks include loans on buildings that are less energy efficient and therefore may have a lower resale value.

Although banks such as HSBC and Bank of America have introduced their own net zero targets, the scrutiny of loans from the carbon-intensive sector has intensified in recent years.

The ECB study focused on 112 banks with combined assets of € 24 billion. Half of these lenders said climate change would have a “material” impact on their businesses over the next three to five years. None of the banks that flagged climate risks as ‘intangible’ had done sufficient analysis, wrote Frank Elderson, ECB executive board member and ECB vice-chairman of the supervisory board, in a blog post. .

Other shortcomings highlighted by the ECB include the lack of stress tests to see what would happen to bank firms under various climate change scenarios, and poor planning of how they should make their business models more resilient in the face to climate change. The most failing banks have been asked to correct them as part of the ECB’s regular supervision.

“Banks urgently need to set ambitious and concrete targets and timelines – including measurable milestones – to mitigate their exposure to current and future climate and environmental risks,” Elderson wrote.

Sasja Beslik, head of sustainability at PFA, Denmark’s largest pension fund and leading environmental, social and governance investor, said he did not expect this to happen. that banks make “major improvements” to their climate risk management strategies “before they experience financial losses. [from lending to unsustainable industries]”.

“Banks mirror the real economy; the real economy is not sustainable, so the way banks operate is not sustainable, ”he added.

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The ECB has found some bright spots. Elderson said two-thirds of banks have made “significant progress” in factoring climate risk into their lending decisions, doing additional due diligence on borrowers’ climate risks or phasing out loans to certain borrowers. of the most exposed industries.

The ECB will publish a report on climate risk disclosure by banks in the first quarter of 2022 and plans a broader review of banks’ strategy, governance and risk management regarding climate change risk in the first half of the year. next year. The review will only announce results for the financial system, not for individual lenders.

In the UK, banks last month submitted data for the Bank of England’s first climate stress tests, which the BoE called “exploratory in nature” with no impact on capital requirements. The results, which will be presented as overall findings for the UK banking system, are expected to be released by May.

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