The transition of the economy away from fossil fuels and towards renewable energy also poses challenges for lenders. At many banks, supervisors still see some catching up to do.
According to the ECB banking supervisory authority, the switch to a more climate-friendly economy has in many cases not yet been reflected in the loan books of large banks in the euro area. An analysis of 95 major financial institutions has shown that the loan portfolios “currently do not correspond to a significant extent with the goals of the Paris Agreement,” wrote the deputy head of banking supervision at the European Central Bank (ECB), Frank Elderson, in an article published on Tuesday .
This leads to “increased transition risks” for around 90 percent of these banks. In addition, around 70 percent of these banks could be exposed to an increased risk of litigation “since they are publicly committed to the Paris Agreement, but their loan portfolio is still not measurably aligned with it,” Elderson summarized the results of the analysis. According to the ECB, the financial institutions examined account for three quarters of the loans in the euro currency area.
The Paris Climate Agreement of 2015 sets out the goal of limiting global warming to as little as 1.5 degrees compared to the pre-industrial era and thus preventing the worst consequences of climate change. In view of advancing climate change, environmentalists and scientists are repeatedly calling for greater efforts, for example to reduce emissions of the greenhouse gas carbon dioxide (CO2).
The economy needs stable banks in a green transition
According to the analysis, the transition risks at financial institutions largely result from exposures to companies in the energy sector that are lagging behind in the gradual elimination of carbon-intensive production processes and are only introducing the production of renewable energies late.
“The economy needs stable banks, especially during the green transition,” Elderson wrote. For banks, in turn, it is crucial to identify and measure the risks arising from the transition to a decarbonized economy. “Transition planning must become a cornerstone of standard risk management because it is only a matter of time before transition plans become mandatory,” Elderson warned.
The ECB banking supervision was created in 2014 as a lesson from the banking and financial crisis. The ECB banking supervisory authority currently directly monitors 113 banks in the euro area, which represent 82 percent of the banking market in the currency area.
Source: Stern
