The European Central Bank (ECB) has issued a stern warning to eurozone banks regarding their inadequate handling of Climate and Environmental (C&E) risks. Frank Elderson, the vice-chair of the ECB's supervisory board, announced during a speech in Brussels that banks could face significant penalties if they do not improve their risk management practices by the forthcoming deadline.
Elderson emphasized that financial institutions failing to address environmental deficiencies might incur penalty payments amounting to up to five percent of their daily banking income. This comes after numerous banks did not meet an interim deadline in March 2023, which was part of a phased approach set by the ECB for incorporating C&E risk management into their operations.
In November 2020, the ECB had published non-binding recommendations for banks, urging them to manage risks associated with carbon-related assets in their portfolios. These guidelines were designed to ensure that borrowing clients are held accountable for environmental impacts. However, according to Elderson's remarks, many banks have yet to conduct proper materiality assessments and disclose the percentage of carbon-related assets in each portfolio, thereby neglecting potential balance sheet risks.
The ECB's call for improved risk strategies is underscored by the impending COP28 climate summit. Elderson expressed concerns about the rapid progression of global warming, which threatens to exceed two degrees Celsius, potentially leading to catastrophic consequences. He stressed the need for sound risk management and questioned the fitness and propriety of bank leaders who continue to overlook these critical issues.
Elderson also urged banks to engage more closely with customers to understand how they are impacted by climate and environmental crises. With the final deadline set for the end of 2024, banks are under pressure to align with ECB's expectations or face punitive measures. The move signals a decisive step by the ECB towards enforcing stricter environmental governance within the financial sector as part of broader efforts to combat climate change.
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