ECB’s remit expands to include supervision of bank transition plans

December 18, 2023|Written by Moriah Costa|European Central Bank

European Union lawmakers are planning to expand the European Central Bank’s remit to include increased supervision of transition plans, building on the central bank’s mandate of climate change-related risks.

The provisional agreement would allow the central bank to assess and monitor the prudential transition plans of financial institutions, as well as reinforce the targets, measures, and actions mentioned in their plans.

Under the new rules, financial institutions’ transition plans should consider both short, medium and long-term time frames of at least 10 years. In addition, the central bank would be able to review the plans as part of its annual supervisory evaluation. It would also have the authority to require banks “to reduce the risks arising in the short, medium and long term, from ESG factors, including those arising from the process of adjustment and transition trends”.

The ECB would be able to intervene if it finds a bank’s management of climate and environmental risk endangers financial stability. It would also have the power to act “when there are risks arising from transition trends towards” EU climate targets.

The central bank’s remit already includes climate change, and it has a secondary mandate to support the general EU economic policies, including the transition to a net-zero economy. The expanded rules will help address the central bank’s prudential concerns around the risks that could arise from banks’ misalignment with the green transition and give it the tools to adequately assess and address banks’ transition risks.

The expanded remit contrasts with other jurisdictions where climate change appears to be less of a priority. UK chancellor Jeremy Hunt left climate change off his annual remit letter to the Bank of England, although climate remains a core focus of the central bank. Still, the lack of focus on climate has worried some advocates that the green transition is no longer a key issue for the UK government.

Meanwhile, in the US the Federal Reserve lags far behind on the Green Central Bank Scorecard for its lack of action on climate change when conducting monetary policy.

The EU provisional agreement was made in June but was only  presented for approval and published on 6 December. It still needs to be confirmed formally by the EU Council and parliament.

This page was last updated December 19, 2023

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