ECB begins applying capital charges to climate laggards

November 8, 2022|Written by |European Central Bank

The European Central Bank (ECB) has begun applying additional capital requirements to banks that fail to effectively manage climate and environmental risks. It has also warned further action will be taken unless institutions meet all its supervisory expectations within the next two years.

The central bank said a “small number” of banks have been impacted after shortcomings were revealed in a recent round of climate risk assessments. They were given charges under Pillar 2 of the capital framework, which is tailored to the risk profile of individual institutions.

Although most banks have not yet been hit by climate-related capital charges, a report on the ECB’s climate thematic review has raised significant concerns over lenders’ practices overall. It says that while the bulk of institutions have now taken basic steps to measure their climate risk and develop strategies to address it, banks are largely failing to actually implement the plans they have set out.

“The majority of institutions have neither translated strategic objectives into tangible steering of portfolio allocations nor addressed material risks with concrete and consequential limits, tolerances and thresholds,” says the report.

The ECB is now setting deadlines for banks to progressively reach full alignment with supervisory expectations on climate and environment-related risks by 2024, which includes integrating climate risks into institutions’ internal capital adequacy assessments and stress-testing.

By March next year, lenders will be expected to catalogue their climate and environmental risks and assess how such risks could impact their businesses. Then before the end of 2023, the ECB wants banks to integrate climate into their governance, strategy and risk management processes.

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“Deadlines will be closely monitored and, if necessary, enforcement action will be taken,” Frank Elderson, vice chair of the ECB’s supervisory board, said in a blog post accompanying the review.

Elderson, who until recently also served as chair of the Network for Greening the Financial System, said the ECB has detected blind spots at 96% of banks in identifying climate-related and environmental risks, particularly in terms of key sectors, regions and risk drivers. He added that actual shifts in revenue “remain rare”.

The thematic review provides the most comprehensive picture yet of how euro area banks have been dealing with climate and environmental risks. The central bank assessed 186 banks holding total assets of €25tn. It follows publication in 2020 of the ECB’s guide to climate-related and environmental risks, which at the time was among the most detailed sets of expectations anywhere in the world.

This page was last updated November 13, 2022

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