Banks taking insufficient climate action now face ECB fines

The European Central Bank (ECB) says it has begun to take enforcement actions – including fines – against banks that do not conduct proper climate risk assessments.

Speaking at a conference this week, Frank Elderson, Vice-Chair of the ECB’s supervisory board, warned that none of the banks under ECB supervision currently meet the expectations it set in 2020 for climate and environmental risk management.

“Therefore, it should come as no surprise that, in line with what we have communicated many times in the past, we have started to adopt enforcement measures. 

“We have issued binding supervisory decisions, including the potential imposition of periodic penalty payments if banks fail on their requirements. In other words, 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,” Elderson said. 

He added that while banks have until the end of 2024 to comply fully with these expectations, they are far behind where they need to be at this point, with many not having performed a materiality assessment of the impact of climate and environmental risks across their portfolio – “the basic starting point for managing any type of risk”.

This assessment should include engagement with the banks’ customers to understand how they are being affected by climate change, and their plans to mitigate and adapt to it. Failing to do so would  amount to turning “a blind eye” to potential risks that have been proven to be material for individual banks and for the financial system as a whole, according to the ECB Vice-Chair.

Financial sector climate goals are also off track

The warning comes as several reports in recent weeks have shown the world is not on track – and even “woefully off track” – to meet the goals of the Paris Agreement.

At the start of November, the Network for Greening the Financial System (NGFS) updated its set of climate-related financial scenarios, including for the first time a ‘too little, too late’ scenario. The purpose of this exercise was to spur faster financial sector action by proving that an immediate transition would cost less than a disorderly, long-term transition – and that “not mitigating climate change will lead to the strongest negative impacts on GDP in the second half of the century”.

“At this half-time juncture, I am sorry to say that it is not at all certain that humankind will remain below that disastrous threshold of two degrees of global heating,” Elderson worried, arguing that capital markets are not playing their potential role in supporting the green transition.

Banking and CSDDD regulations

Noting the importance of clear and consistent regulation to support the financial sector’s climate transition, he also expressed the ECB’s support for the inclusion of financial institutions within the scope of the Corporate Sustainability Due Diligence Directive (CSDDD) that is being discussed in the EU.

The new law will mandate companies to mitigate environmental and human rights risks across their supply chains, but the inclusion or not of financial services is a contentious point. Some member states believe that the decision should be left to them, whereas the European Parliament is pushing for the sector’s inclusion at European level. 

“In the absence of clear reasons to the contrary, which I fail to see, financial undertakings should not be treated differently from other companies,” said Elderson.