The European Central Bank sees progress at the banks in terms of taking climate and environmental risks into account, but calls for further steps.
(Photo: dpa)
Frankfurt The banking supervisors of the European Central Bank (ECB) still see major deficits in European banks when it comes to considering climate and environmental risks in their risk management and strategy. This emerges from a study for which the central bank had examined the handling of such dangers at 186 institutions, including 39 financial institutions from Germany. The report provides information on whether banks adequately identify and manage environmental aspects.
The ECB is observing progress at banks in considering such dangers in their risk management and in their strategy: Around 85 percent of banks are now using at least basic procedures in most areas. However, most lack more sophisticated methods and granular information on climate risks.
“As a result, banks significantly underestimate the size and extent of such risks, and almost all banks (96 percent) have blind spots in their assessment,” writes the ECB. “Put simply, the glass is filling, but it’s not even half full,” wrote ECB President Frank Elderson, who is also deputy chief of ECB Banking Supervision, in a blog post.
In his blog post, Elderson lists three points that bother him: On the one hand, there are these blind spots of the institutes when identifying environmental risks – with a view to industries, regions and risk drivers. Where banks identify the risks, they often do not recognize the extent and are usually unable to estimate how these risks will develop in the future.
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Elderson’s second point of criticism: “Most of the bank’s strategy papers are full of references to climate change, but shifts in the sources of income are rare,” he complains. Banks are very interested in new forms of sustainable business and would phase out more climate-damaging activities. But very few banks that want to be climate-neutral by 2050 have already set themselves intermediate targets.
And “most banks have not answered the question of what they will do with customers who no longer have sustainable revenue streams because of the green transition of the economy,” said Elderson. “Too many banks are still hoping for the best and not preparing for the worst.”
Banks make exceptions for climate sinners
Another problem from the bank supervisor’s point of view: Although more than half of the banks have introduced guidelines, they do not apply them. For example, some banks have policies describing how to deal with customers engaged in risky activities. “But when we evaluate real cases, we see that customers – even notorious polluters – have sometimes been exempted from these guidelines,” Elderson says.
Now the ECB is demanding more speed from the institutes when considering climate and environmental risks. The ECB has set individual deadlines for the institutions to meet all expectations by the end of 2024 that the central bank’s banking supervisors had published in a guide on how to deal with climate and environmental risks.
In a first step, all institutions should be able to categorize climate and environmental risks and fully assess their impact on banking activities by March 2023 at the latest.
The ECB emphasized that banks that fail to do so must also expect sanctions. This is because banking supervisors are increasingly taking into account factors such as how banks deal with climate risks in their individual supervisory discussions with banks. This also involves the question of how high the individual equity buffers are that the central bank imposes on the institutions. The ECB determines these individual buffers based on the risk profile of the banks, which also includes organizational deficits, for example in dealing with environmental risks.
More: ECB supervision is putting pressure on banks to become “greener”.