A European Central Bank (ECB) executive has delivered a strong critique regarding the insufficient efforts by banks in addressing climate risks.
In a speech at a joint conference with the European Bank for Reconstruction and Development (EBRD), ECB board member Frank Elderson highlighted that none of the supervised banks meet the ECB’s expectations, noting, “All banks have several blind spots and are potentially exposed to significant climate risks. They are far from fulfilling the supervisory standards we have set, and it’s imperative that they catch up, as their climate risk strategies will ultimately affect their supervisory requirements.”
Since 2021, the ECB has recognized climate change as a critical risk factor for the European banking sector. According to its latest Financial Stability Review, approximately 80% of European banks are already facing climate-related physical risks.
In November, the ECB distributed self-assessment questionnaires to banks, which are currently being evaluated ahead of a comprehensive supervisory review next year that will impact banks’ Pillar 2 capital requirements. This exercise is significant, as it will cover plans related to €24 trillion in banking assets.
Elderson remarked, “The vast majority of European banks are not where they should be — they are aware of this: 90% of practices reported by banks are considered only partially or not at all aligned with ECB’s supervisory expectations.”
He further pointed out that over half of the banks lack a strategy for assessing climate risk impacts. This is particularly concerning given that among the 20% of banks with a systematic approach to evaluating climate risks, nearly all report that these risks are currently affecting or will soon affect their risk profiles.
Moreover, only about 40% of banks have explicitly designated responsibility for climate risk management to their governing bodies, and of those, three-quarters do not provide reports on climate risks to management. Elderson questioned, “How can the management effectively manage risks they are unaware of?”
Banks often attribute their slow progress in integrating climate risks into their risk management frameworks to a lack of data availability. However, Elderson argued that many banks have not made adequate efforts to identify what data they need to appropriately account for climate risks.
“The ECB expects all banks to utilize the new data available on climate risks and begin assessing the materiality of the risks they are facing,” he concluded. “While acting on incomplete data carries its own risks, the dangers of inaction regarding climate change are significantly greater.”