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Eurozone banks are required to do more to deal with climate change risks

The European Central Bank has asked banks to “urgently” improve plans to protect their businesses from climate change risks after a review found widespread shortcomings in how Lenders’ approach to environmental challenges.

The ECB, which has been directly overseeing the largest banks across the eurozone for seven years, has completed first assessment of banks’ readiness to cope with increased climate and environmental risks. It found that none of the banks under its supervision came close to meeting the ECB’s expectations. The central bank said lenders “ultimately” may face higher capital needs as it integrates climate risk assessment with its regular job of setting each bank’s capital level. row.

The biggest risk to banks comes from exposure to energy companies that are not geared towards more sustainable practices and energy-intensive sectors such as aviation, according to the assessment. Other risks include lending to buildings that are less energy efficient and therefore may have a lower resale value.

Although banks like HSBC and Bank of America have introduced their own unreal goals, scrutiny has increased in recent years over the industry lending to carbon-intensive activities.

The ECB study focused on 112 banks with total assets of 24 billion euros. Half of the lenders say climate change will have a “material” impact on their business within the next 3-5 years. None of the banks that reported climate risks as “immaterial” performed the full analysis, Written Frank Elderson, ECB executive board member and vice-chairman of the ECB’s supervisory board, in a blog post.

Other shortcomings highlighted by the ECB include the lack of stress testing to see what would happen to the banks’ business in various climate change scenarios and poor planning of how they should do it. make its business model more resilient in the face of climate change. The banks with the biggest shortcomings have been urged to correct them as part of the ECB’s regular oversight.

“Banks urgently need to set ambitious and specific goals and timelines – including measurable intermediate milestones – to minimize their exposure to risk,” Elderson writes. current and future climate and environmental risks,” Elderson wrote.

Sasja Beslik, head of sustainability at Denmark’s largest pension fund PFA and a prominent investor in environmental, social and governance, said he did not expect banks to do so. major improvements” in their climate risk management strategy “before they see a financial loss” [from lending to unsustainable industries]”.

“Banks are mirroring the real economy; the economy is really unsustainable so the way banks operate is also unsustainable,” he added.

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The ECB has found some bright spots. Elderson said two-thirds of banks have made “meaningful progress” in incorporating climate risk into their lending decisions, by performing further due diligence on borrowers’ climate risks. or phase out lending to some of the most vulnerable industries.

The ECB will publish a report on banks’ climate risk disclosures in the first quarter of 2022 and is planning a broader review of banks’ strategy, governance and risk management for with climate change risks in the first half of next year. The review will only inform the financial system, not individual lending institutions.

In the UK, last month, banks submitted data for the Bank of England’s first climate “stress test”, which the BoE describes as “discovery in the wild” with no request. on capital. The results, which will be presented as aggregated findings for the UK banking system, are expected to be published in May.

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