The ECB says banks are generally failing to take adequate action to limit climate change-related risk, and face financial sanction

Frankfurt (Germany) (AFP) - The European Central Bank on Tuesday threatened to impose financial penalties on banks who are slow to minimise climate change-related risks stemming from their activities.

The ECB, which oversees banks operating in the 20-nation eurozone, warned it would impose “penalty payments” should they fail better to address management of climate-related and environmental (C&E) risk, supervisory board vice-chair Frank Elderson said in a Brussels address.

Noting that “we expect banks to manage C&E risks just like any other material risk they are exposed to,” Elderson said that the ECB had found banks were generally lagging in this respect “and we have told those banks to remedy the shortcoming by a certain date and, if they don’t comply, they will have to pay a penalty for every day the shortcoming remains unresolved.”

The ECB set a deadline of next year having determined there were major gaps in how the banks were assessing their impact on climate change and banks now face a financial penalty which theoretically could be as much as five percent of daily banking income.

The central bank found that many banks had not delivered in meeting an interim deadline of last March.

The ECB published in 2020 a slew of recommendations regarding bank governance in climate risk terms, including listing the percentage of carbon-related assets in each portfolio.

For Elderson, “failing to adequately manage C&E risks is no longer compatible with sound risk management. Such a failure also increasingly calls into question the fitness and propriety of those in charge of establishing and steering banks’ practices. To manage their own risks, banks need to engage with their customers to gain a deep understanding of how they are being affected by the climate and environmental crises and how they will mitigate and adapt to the consequences.

“By failing to complete a proper materiality assessment, these banks are continuing to turn a blind eye to potential risks on their balance sheet.”

A fortnight before the COP28 meeting on the environment, Elderson highlighted uncertainty on “whether we will be able to limit global heating to below the two degrees Celsius mark, let alone 1.5 degrees, which is increasingly out of reach.”

Indeed, “the threat of a disastrous scenario in which global heating will far surpass two degrees is very real, said Elderson, concluding that what was required was “meaningful, urgent and effective action that builds on the foundations that have been laid in recent years.”