European banks under-report climate risks

According to the European Central Bank (ECB), which published an assessment on March 14, European banks lack transparency on climate and environmental risks. These risks are likely to have an impact on the financial health of the banking sector.

109 eurozone banks scrutinized by the ECB

The European Central Bank considers the communication of climate and environmental risks by the main banks in the euro zone to be clearly inadequate, and even threatens to publish a list of institutions that " repeatedly " fail to publish these risks.

To reach this conclusion, the ECB assessed 109 major banks in the eurozone. As Frank Elderson, ECB Executive Board member and Executive Director of Banking Supervision, said in a statement, " Given the importance, urgency and enduring nature of climate change, we call on banks to step up their efforts to measure and manage climate and environmental risks in line with our expectations. "

Furthermore, when it comes to taking environmental risks into account, banks limit themselves to the climate issue. However, the ECB insists on other risks, such as those relating to biodiversity, pollution and water scarcity.

" Banks can make significant savings if, taking advantage of the momentum, they broaden the scope of their preparations to cover all these risks and are thus ready for a new, more concrete regulatory and supervisory environment," explains Frank Elderson.

Climate risk: ECB steps up pressure on banks

According to the ECB, in its report assessing banks' progress towards transparent disclosure of their climate and environmental risk profiles published in March 2022, fewer than one in five banks are transparent about the method and criteria used to meet the Paris Agreement target of limiting global warming to 1.5°C.

75% of banks do not specify the impact of climate and environmental risks on their risk profile, and 60% fail to describe how their strategy could be affected by physical or transition risk. Yet the financial consequences could be serious for banks.

" We see a considerable gap between banks' perception of the significance of climate and environmental risks as communicated to us, the supervisors, and what banks choose to disclose publicly," warns the ECB.

According to the institution, banks try to compensate for this lack of transparency " by publishing a large volume of information on ecological topics ", which creates " white noise and no real substance on what markets and supervisors really want to know: to what extent is a bank exposed to climate and environmental risks, and what is it doing to manage this exposure?"

In the ECB's view, while it is important for banks to be transparent about energy savings in their establishments, it is far more essential for them to communicate how they are " orienting their activities towards risk management practices that are aligned with a carbon-neutral economy ".

The European Central Bank stresses the impact of this lack of transparency, pointing out that banks are exposing themselves to " legal and reputational " consequences: customers and investors, as well as other financial players, are now demanding detailed information on the climate actions taken by banks.

The institution points out that non-disclosure of risk exposures of any kind " constitutes a violation of the capital requirements regulation ", thus increasing the pressure on banks. A new assessment will take place at the end of the year, and " significant progress " is expected between now and then.