The European Central Bank has threatened to name and shame banks after finding that none of the 109 lenders it oversees meet its climate risk disclosure expectations but produce “a lot of white noise and no real substance”.
Like most major central banks, the ECB is stepping up its efforts to address growing public concern about climate change, which its president Christine Lagarde has called “the biggest challenge that is addressed to us”.
However, it is starting to lose its patience with eurozone banks after finding “significant gaps” in their disclosure of environmental risks, which threatens to undermine its debut stress test later this year to assess the impact of climate change on the banking system.
Banks will be required to publish more detail on their exposure to climate risks from early next year when new rules from the European Banking Authority take effect.
The ECB called on banks to “take decisive action” after finding that none met its supervisory expectations for disclosures and only 15 per cent published data on the emissions of the companies they finance, known as scope 3.
Three-quarters of banks did not disclose whether climate and environmental factors had a “material impact on their risk profile”, it said, even though half of the banks have told the ECB they are exposed to such risks.
“There is very little justification for this lack of substantial progress,” said Frank Elderson, an ECB executive board member. “We stand ready to use the full array of supervisory tools at our disposal to ensure banks’ climate and environmental disclosures are up to our standards and ultimately that eligible banks are prepared for the new regulatory requirements.”
He added that any bank failing to disclose its exposure to climate risks could be in breach of EU law and the ECB had “the option to publicly list those banks which repeatedly fail to disclose their climate and environmental risks”.
While there had been some progress in banks’ climate disclosures — with 70 per cent now making disclosures versus only half of them two years ago — the ECB said six out of 10 banks “do not describe how transition risk or physical risk could affect their strategy”.
“Banks are trying to compensate for the poor quality of their disclosures by issuing a great volume of information around green topics,” said Elderson, adding that investors and supervisors were left with “a lot of white noise and no real substance”.
Under the ECB’s stress test this year, banks must model the impact of several short-term scenarios, including a steep increase in carbon prices, a heatwave and heavy flooding.
They must also assess how they would fare under long-term scenarios, including one called the “hothouse scenario” in the event that no action is taken to cut carbon emissions and temperatures rise by 3C by 2080, leading to “severe physical risks and extreme costs” from more catastrophic weather events such as floods and fires.
Temperatures have already risen by at least 1.1C since the pre-industrial era.
The exercise will have no pass or fail marks and the results will not directly feed into banks’ capital requirements. But the ECB said on Monday that it was “gradually integrating climate and environmental risks into its regular supervisory methodology”, which will ultimately feed into capital requirements.