90% of big eurozone banks face serious transition risks, says ECB

January 29, 2024|Written by |European Central Bank

The vast majority of the eurozone’s big banks are failing to decarbonise their portfolios in line with the Paris Agreement, according to a new report by the European Central Bank (ECB) that warns 90% of them face elevated transition risks as a result.

The ECB said major banks were continuing to disproportionately supply credit to carbon-intensive sectors that are falling behind in their emissions reductions, exposing them to higher risks of defaults by businesses that will become uncompetitive in a lower-carbon future.

“To be clear: it is not for us supervisors to tell banks who they should or should not lend to,” ECB board member Frank Elderson said in a blog post. “However, we will continue insisting that banks actively manage the risks as the economy decarbonises.”

The ECB report, titled Risks from Misalignment of Banks’ Financing with the EU Climate Objectives, covers 95 banks accounting for three quarters of loans in the eurozone. It focuses on six key sectors responsible for more than 70% of global CO2 emissions: power, automotive, oil and gas, steel, coal and cement.

“Based on the six sectors analysed, it is already clear that there is a pressing need for a significant transformation in the euro area production infrastructure financed by euro area banks in terms of alignment with the targets set out in the Paris Agreement,” the report says,

“Among the 95 significant institutions analysed, a staggering 90% are found to be misaligned.”

In addition, 70% of the banks are at risk of future legal action “as they have committed to the Paris Agreement, but their credit portfolio is not aligned with it”.

The report also notes that on average, loans to companies that are failing to decarbonise are double the size of loans to the companies that are on track.

The extent of the transition risks vary from sector to sector. In power production, the majority of loans are going to businesses that are struggling to build out renewable energy infrastructure fast enough to keep up with the Paris Agreement’s targets.

In the car industry, a healthy amount of credit is being extended to companies for investment in electric vehicle production – but “internal combustion engine car production shows little sign of being phased out”.

And in the oil and gas sector, while production may be declining within the eurozone itself, banks are continuing to finance the expansion of production outside the euro area, according to the report.

The steel industry provides a rare bright spot, with production “already operating at a level of carbon intensity that is not expected to be achieved until 2033”.

The ECB has set a deadline of the end of 2024 for banks to meet its full climate disclosure requirements, which include details on their alignment with the expected path to decarbonisation.

The central bank began applying additional capital requirements to banks that fail to effectively manage climate and environmental risks in late 2022.

However, the ECB itself has some way to go when it comes to aligning with the Paris Agreement. A report by Positive Money Europe and the Heinrich Böll Foundation this month called on the central bank to better use the policy tools at its disposal to address climate change, including by actively divesting from dirty bonds.

This page was last updated January 30, 2024

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