Climate complacency endangers eurozone banks – ECB

The European Central Bank (ECB) stated on Tuesday that most large European banks were not adapting their operations to the impending decarbonisation of the economy, which exposes them to heightened financial, reputational, and legal risks.

Despite the ECB’s long-standing efforts to encourage banks to incorporate climate factors into their lending and risk assessment practices, banks have largely ignored these warnings and potential additional capital requirements.

“Our analysis of 95 banks covering 75 per cent of euro area loans shows that currently, banks’ credit portfolios are substantially misaligned with the goals of the Paris Agreement, leading to elevated transition risks for roughly 90 per cent of these banks,” ECB board member Frank Elderson said in a blog post.

According to a new report by the ECB, businesses with assets in sectors such as oil and gas, coal, power generation, automotive, steel, and cement have a relatively small overall credit exposure.

This exposure amounts to about 189 billion euros ($206 billion), which represents approximately 5 per cent of the credit to firms.

The survey revealed that 13 banks each had exposures exceeding 5 billion euros to the six main transition sectors, which contribute to about half of the total CO2 emissions in the euro area.

The ECB has set a deadline until the end of 2024 for banks to comply with its climate disclosure requirements, which include their deviation from the anticipated decarbonisation pathway.

The ECB has warned that banks failing to meet these requirements may face additional capital requirements.

“Transition planning must become a cornerstone of standard risk management, as it is only a matter of time before transition plans become mandatory,” Elderson said.

A significant risk for banks is when their actions don’t align with their stated commitments, as many banks claim to prioritise climate change, but their actions often indicate a lack of urgency.

“Seventy per cent of these banks could face elevated litigation risks as they are publicly committed to the Paris Agreement, but their credit portfolio is still measurably misaligned with it,” Elderson said.