The EU has been urged to bolster the powers of the ECB and other supervisors to judge banks’ climate transition plans, and to ensure they follow them.
Under proposals currently being considered by the bloc, banks are set to be given a legal requirement to publish plans showing how they will address risks arising from misalignment with the EU’s climate and environmental policies.
A report published by the Institute for Climate Economics (I4CE) says the EU should go further, and fully integrate the transition plans into its supervisory review and evaluation process (SREP). It says doing this would allow supervisors to use stronger policy levers in cases of non-compliance, including applying additional capital requirements.
ECB policymakers have signalled their openness to such a role. Executive board member Frank Elderson wrote in a blog post last week that the bank would welcome the enhanced responsibility for overseeing the plans. Banque de France governor François Villeroy de Galhau said in April that banks’ failure to meet their climate goals would present a material transition risk, and could necessitate capital add-ons.
The report’s authors also stipulate in detail what they believe should be included in the transition plans. They want to see banks required to publish five-yearly targets for decarbonisation, leading up to carbon neutrality in 2050, but without deferring emissions reductions efforts to the end of that period.
The paper recommends that banks should have to lay out emissions reduction plans for each sector in their portfolio. The authors say these should be based on roadmaps published by national and European authorities, such as the French ecological transition agency Ademe, which has issued strategies for decarbonising multiple sectors of the French economy.
“The transition plans must concern all sectors, as too many banking players are still only looking at the energy aspect of the transition,” warns the report. “It is nevertheless necessary to prioritise the projects for the banks and to start with sectoral analyses and plans for the sectors that emit the most.”
Until now, EU banking supervisors have focused their efforts on setting supervisory expectations, improving transparency and conducting climate stress-tests. The IC4E paper says that, although worthwhile, these measures have not yet delivered real change in banking practices to align them with orderly transition paths.
The UK is also set to make the publication of climate transition plans mandatory for large firms, including banks. In April, the Treasury launched a taskforce to develop a gold standard for the plans. The Bank of England’s prudential regulation authority has said that it will be paying close attention to banks’ plans, and will give a further update in due course as to how they will be considered in the supervisory process.
This page was last updated May 9, 2022
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