BRUSSELS (BLOOMBERG) – The European Central Bank has warned that most lenders it oversees have yet to produce concrete plans showing how they will change their business strategies to account for climate change.
While around half the 112 institutions overseen by the Frankfurt-based central bank are “contemplating setting exclusion targets for some segments of the market, only a handful of them mention actively planning to steer their portfolios on a Paris-compatible trajectory,” ECB executive board member Frank Elderson said in a blog post on Monday (Nov 22).
He was referring to the 2015 Paris climate agreement that enshrines key temperature targets to limit global warming.
Mr Elderson said a proposal by the European Commission to introduce a legal requirement that lenders develop transition plans for their businesses towards carbon neutrality was “welcome”, and that the ECB would help monitor banks’ progress in that transition.
The ECB has previously criticised the industry for the weak state of its preparation for risks tied to climate change.
Lenders’ transition plans towards carbon-neutrality “should highlight banks’ alignment with and potential divergences from the relevant policy objectives through which the EU implements the Paris Agreement at any point between now and 2050”, Mr Elderson said.
“They should be part of a bank’s strategy-setting and closely linked to its business model and business plan.”
The supervisor plans a thorough stress test of banks’ climate risks next year, in which it will look into the carbon intensity of loan books and trading operations, as well as the industry’s ability to cope with the physical fallout from climate change on asset values.
Banks that perform badly in next year’s climate stress test may face higher capital requirements, which would erode their ability to hand profits back to shareholders.
The tougher regulatory environment comes amid increasingly dire warnings that the world is woefully behind in cutting carbon emissions, adding to pressure on governments and businesses to deliver more ambitious climate plans.
Under the Paris climate treaty, nearly 200 nations agreed to take steps to limit global warming to “well below” 2 deg C above pre-industrial levels and aim for 1.5 deg C where possible. In addition, nations aimed to cut greenhouse gas emissions to net zero by mid-century.
But current national climate plans submitted to the United Nations under the Paris Agreement put the world on a path to warm in excess of 2 deg C and getting the finance industry on board is key to reducing the risks from an increasingly hotter world.