Top Stories
Most euro zone banks face risk from climate complacency, ECB finds
Global Banking and Finance Review
Company
FRANKFURT (Reuters) – Most big banks in Europe are failing to adjust their business to the looming decarbonisation of the bloc’s economy and thus face increased financial, reputational and legal risk, the European Central Bank (ECB) said on Tuesday.
The ECB has been pushing banks for years to factor climate considerations into how they lend and assess risk but lenders have failed to heed its warnings and threats of additional capital requirements.
“Our analysis of 95 banks covering 75% 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% of these banks,” ECB board member Frank Elderson said in a blog post.
The overall credit exposure is comparatively small, however, worth about 189 billion euros ($206 billion) to business with assets in the oil and gas, coal, power generation, automotive, steel, and cement sectors, or roughly 5% of credit to firms, the ECB said in a new report.
Of the surveyed banks, 13 had exposures in excess of 5 billion euros each to the six key transition sectors, which account for roughly half of total CO2 emissions in the euro area.
Banks have been given until the end of 2024 to meet the ECB’s climate disclosure requirements, including how much they are deviating from the expected decarbonisation pathway. If they fail this, then additional capital requirements may be introduced, the ECB has said.
“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 big risk for banks is that their actions deviate from their own communication. While plenty of banks say they take climate change seriously, their practices suggest complacency.
“Seventy percent 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.
($1 = 0.9186 euros)
(Reporting by Balazs Koranyi; Editing by Mark Potter)
Climate complacency refers to the lack of action or urgency by banks to address climate change risks in their lending and investment strategies.
The Paris Agreement is an international treaty aimed at reducing greenhouse gas emissions and limiting global warming to well below 2 degrees Celsius.
Transition risks are potential financial losses that arise from the shift towards a low-carbon economy, affecting businesses and financial institutions.
A credit portfolio is a collection of loans and credit products held by a financial institution, reflecting its lending strategy and risk exposure.
Climate disclosure requirements are regulations mandating financial institutions to report on their climate-related risks and the alignment of their portfolios with sustainability goals.
Explore more articles in the Top Stories category
