The European Central Bank has asked banks to “urgently” improve plans to protect their businesses from climate change risk after a review found widespread shortcomings in lenders’ approach to environmental challenges.
The ECB, which has directly supervised the biggest banks across the eurozone for seven years, has completed its first assessment of banks’ preparedness to deal with increased climate and environmental risks. It found that no bank under its watch was close to meeting the ECB’s expectations. The central bank said lenders might “eventually” face higher capital demands as it integrated climate risk assessments with its regular work on setting individual banks’ capital levels.
The biggest risks to banks come from exposure to energy companies that do not pivot to more sustainable activities and energy-intensive sectors such as aviation, according to the assessment. Other risks include lending 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, scrutiny has increased in recent years of the sector’s lending to carbon-intensive activities.
The ECB’s study focused on 112 banks with combined assets of
€24tn. Half of those lenders said climate change would have a “material” impact on their businesses over the next three to five years. None of the banks that reported climate risks as “immaterial” had carried out sufficient analysis, wrote Frank Elderson, ECB executive board member and vice-chair of the ECB’s supervisory board, in a blog post.