The European Central Bank (ECB) has issued a stern warning to banks that do not adequately assess and disclose their exposure to climate-related and environmental risks. The ECB said it could impose financial penalties on banks that lag behind in this area, as part of its supervisory role.
ECB sets 2024 deadline for banks to comply with climate risk standards
The ECB has set a deadline of 2024 for banks to meet its expectations on how they manage and report their climate risks. The ECB said it had identified major gaps in how banks were addressing these risks, which could have significant implications for their profitability and solvency.
The ECB expects banks to:
- Incorporate climate risks into their business strategies, risk management frameworks and governance structures
- Conduct regular climate stress tests and scenario analyses to assess the impact of different transition and physical risks on their balance sheets and operations
- Disclose their climate risk exposures and mitigation actions in a transparent and consistent manner, following the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD)
The ECB said it would monitor the progress of banks and take supervisory measures if they fail to meet its expectations. These measures could include financial penalties, which could be as high as five percent of daily banking income.
ECB publishes results of economy-wide climate stress test
The ECB also published the results of its second economy-wide climate stress test, which analysed the resilience of firms, households and banks to three transition scenarios, which differ in terms of timing and ambition. The scenarios were:
- An accelerated transition, which frontloads green policies and investment, leading to a reduction in emissions by 2030 in line with the goals of the Paris Agreement
- A late-push transition, which continues on the current path, but does not speed up until 2026 (and is still intense enough to achieve Paris-aligned emission reductions by 2030)
- A delayed transition, which also starts only in 2026, but is not sufficiently ambitious to reach the Paris Agreement goals by 2030
The results showed that firms, households and banks would benefit from a faster transition, as it would reduce the medium-term costs and risks associated with climate change. The ECB said that frontloading green investment would significantly lower energy expenses and credit risk, while boosting profits and purchasing power. On the other hand, delaying or postponing the transition would increase the impact of physical risks, such as extreme weather events, and miss the Paris Agreement targets.
The ECB said that its stress test was not a forecast or a policy recommendation, but a tool to assess the potential implications of different transition paths for the economy and the financial system. It said that the stress test complemented its banking supervision climate stress test, which analysed risks for individual banks from a bottom-up perspective in July 2022.
ECB calls for more decisive policies to ensure a speedy and orderly transition
The ECB Vice-President Luis de Guindos said that the stress test results highlighted the need for more decisive policies to ensure a speedy and orderly transition towards a net-zero economy in line with the Paris Agreement goals. He said that moving at the current pace would push up risks and costs for the economy and the financial system, and that there was a clear need for speed on the road to Paris.
“We need more decisive policies to ensure a speedier transition towards a net-zero economy in line with the goals of the Paris Agreement. Moving at the current pace will push up risks and costs for the economy and the financial system. There is a clear need for speed on the road to Paris,” he said.
The ECB said that it was committed to playing its part in addressing climate change, both as a supervisor and as a monetary policy maker. It said that it was integrating climate considerations into its monetary policy framework, as part of its strategy review. It also said that it was supporting the development of a common taxonomy and standard for green finance, as well as enhancing its own climate-related disclosures.
