Climate action is in banks’ interest, says ECB

(Bloomberg) — European banks could earn nearly 6 billion euros ($6.6 billion) in annual revenue by financing the transition to a more sustainable economy, according to their top regulator.

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“The balance sheet choices banks make regarding green and non-green assets will have a significant impact on their bottom line,” said Andrea Enria, who heads the European Central Bank’s supervisory board. “Consumers and investors will walk away from banks if they disagree with their approach to climate change and environmental challenges.”

The European Central Bank is pushing banks to prepare for losses they could face from extreme weather or the possibility of polluting companies going bankrupt as authorities seek to remove carbon from the economy. Yet this transition is also a chance for lenders to increase their income, Enria said in a speech on Monday.

The additional revenue opportunity for listed European banks is based on the $2.3 trillion in funding per year that will be needed from global banks for the green transition, Enria said, citing an average of funding needs estimates.

He added that he finds it “a bit frustrating” that questions about the ECB’s approach to climate risk often focus on how these will ultimately be addressed in capital requirements.

“It gives the impression that the banks would veer in the direction indicated by their supervisors and only correctly capture the relevant risks if they were threatened by the big stick of capital,” he said. “But it is clearly in the interest of the banks, before and even more so than in the interest of the community they serve, to act quickly in this area.”

The ECB’s climate stress test and in-depth review this year was not designed to increase capital charges and the main result will be reflected in qualitative recommendations, he said.

Still, “it may well be that serious shortcomings identified in governance or risk management practices could affect banks’ scores, and therefore indirectly have a quantitative effect” on banks’ personalized capital requirements, Enria said. .

The ECB has already issued a “relatively large number” of recommendations to banks last year on how they can close the gaps in meeting its expectations for climate risk management, Enria said. The ECB will “gradually intensify prudential pressure on banks lagging behind industry best practice,” he added.

Enria also addressed the war in Ukraine, saying banks “need to ensure they have strong internal processes and controls in place to avoid violations” of related sanctions.

“Banks should be aware that actions that could amount to financing an illegal war condemned by the international community, or willfully profiting from violations of international sanctions, are totally against good corporate citizenship,” he said. he declared. “In addition to governments and supervisors, consumers and investors will also have a say.”

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