ECB’s Elderson: No stepping back on climate

Climate-related risks will continue to feature in the European Central Bank’s (ECB) supervisory priorities despite political headwinds, as these risks are becoming an immediate concern for financial stability and economic growth in the bloc,  a senior central banker at the ECB has said.

Frank Elderson, member of the executive board of the ECB and vice-chair of its supervisory board, said the central bank would not be taking a step back on climate and nature risks, as doing so would mean failing to account for banks’ soundness.

“No matter where political headwinds are blowing, the risks from climate change will stay, be it from physical or transition risks – and likely a combination of both,” he said during an ECB industry dialogue on climate and nature risk management.

Growing risk

Research from the ECB has found that extreme weather events could account for a loss of up to 5% of euro area economic output in the next five years, which would be on par with the great financial crisis. And other research from insurance firms has found that damage from natural disasters has skyrocketed in the last 30 years and continues to climb 5% to 7% every year.

Climate and risk management practices introduced in 2020 have reached a stage where it can become a “business-as-usual approach in our supervision,” Elderson said.

This means that the ECB’s supervisory teams will monitor individual banks to make sure any findings are dealt with in a timely manner. In addition, climate and nature risks will feature in standard supervisory actions like inspections, fit and proper assessments, and stress tests.

While banks have improved their capacity for accounting for climate risks, financial institutions need to be more comprehensive, as sound practices related to climate change are often only applied to certain exposures or geographical areas, Elderson said.

“That is why our supervisory teams will continue to track progress and urge banks to implement sound practices across all material portfolios, geographical areas and risk categories, covering both physical and transition risks,” he said.

Credible data is key

 But he warned that for banks to be able to consider such risks, reliable and comparable data is needed and excluding too many companies from the corporate sustainability reporting directive (CSRD) could prevent access to reliable information.

“Excluding too many firms from the CSRD could impair the availability of comparable information about important parts of our economy,” he said.

The European Parliament is currently debating proposed omnibus changes to the CSRD, which would drastically reduce the number of companies obligated to report their climate and emissions data. The EU is under pressure to remain competitive and introduced the omnibus package as a way to try and cut the amount of red tape for smaller firms.  

New commercial opportunities 

But Elderson says European banks are at a competitive advantage in the global sustainable finance market and maintaining this edge is crucial. The latest euro area bank lending survey from the ECB showed that there is a growing demand for transition finance, presenting a business opportunity for banks.

“Having the data and information architecture from risk management in place helps banks to support clients transitioning in sectors they know very well,” said Elderson.

Meanwhile, says Elderson, the ECB will continue to monitor banks’ progress on preparing transition plans that come into effect next year under rules set by the European Banking Authority (EBA). The central bank will also publish examples of good practices of nature-related risk management being developed by banks.

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