ECB charges lenders to ramp up climate moves

The European Central Bank is issuing fresh deadlines to achieve those standards as it issues a warning that many of the financial institutions it regulates are moving too slowly to protect themselves and Europe’s banking system from the effects of climate change.

The European Central Bank (ECB) acknowledged that progress had been made but noted that an examination of 186 banks released on Wednesday revealed unequal development and that “the glass remains half full.”

Banks must comply with the standards related to climate change by the end of 2024, according to dates established by the Frankfurt, Germany-based central bank for the 19 nations that use the euro.

In its capacity as a financial regulator, the ECB is pressuring banks to identify potential climate change risks and lay out their response plans. Banks are essential to the running of the European economy because, unlike the U.S. practise, for example, most enterprises in Europe obtain the operating credit they require through banks rather than from financial markets.

Elderson, one of the six members of the ECB’s executive board and vice chairman of its supervisory board charged with overseeing banks, stated that most banks “have thus not yet answered the question of what they will do with clients who may no longer have sustainable revenue sources because of the green transition. In other words, too many banks are still hoping for the best while not preparing for the worst.”

Compared to the U.S. Federal Reserve, which has only taken limited steps to include climate issues in its regulatory framework, both the ECB and the Bank of England have given more consideration to climate change. Republicans in Congress have criticised the Federal Reserve, claiming that the matter is beyond their purview.

According to Elderson, the strategy documents of banks in Europe frequently make mention of climate change, but actual consumer moves to more ecologically sustainable business models and revenue sources are still uncommon. Elderson added that banks are not establishing intermediate goals for achieving net zero carbon emissions by 2050 or gathering in-depth information at the level of specific loans and investments.

It’s unclear how these initial actions can protect the banks’ business models from the effects of climate change and environmental challenges in the coming years, he said, even though many are phasing out certain operations, such as financing coal power generation.

The bank’s main responsibility is to manage inflation, not the environment, which it is attempting to do by hiking interest rates. It may, however, pursue other objectives, such as backing EU economic policies generally, which include combating climate change, provided that doing so does not conflict with reducing inflation.

Under the 2015 Paris climate accords, the European Union pledged to achieve net zero emissions by 2050. The ECB also stated in September that it would assign climate scores to companies before purchasing their bonds and intended to give priority to those companies that were disclosing and reducing their greenhouse gas emissions the most.