ECB to impose first-ever fines on banks for climate failures

THE European Central Bank (ECB) is set to take the unprecedented step of imposing fines on several lenders for their protracted failure to address the impact of climate change.

As many as four lenders face penalties after not meeting deadlines set by the ECB for assessing their exposure to climate risks, according to sources familiar with the matter. The amounts are not final yet and may be largely symbolic, the sources said, who asked not to be named as the move is not public.

A spokesperson for the ECB, which directly oversees more than 100 banks, declined to comment.

The imposition of fines still marks an unusually harsh step towards forcing banks to comply with the ECB’s views on how they should manage climate risks. The move comes after years of pressure, with former banking supervision head Andrea Enria stating in September that the ECB would resort to such sanctions as an alternative to higher capital requirements.

The fines rack up every day and can amount to as much as 5 per cent of a lender’s daily average revenue. For a bank with annual revenue of 10 billion euros (S$14.6 billion), for example, that would suggest daily penalties of as much as 1.4 million euros in the toughest scenario, although the actual fines imposed may be much smaller.

The banks singled out for penalties are now accruing daily fines for as long as the deficiencies persist, the sources said. Mitigating factors may be taken into account as well, meaning some fines could be reduced or even negated, said one of the sources.

The ECB has repeatedly warned that lenders are not doing enough to prepare for the fallout of extreme weather shocks on asset values, or the risk that clients with big carbon footprints might go out of business. The watchdog has said it initially threatened 18 banks with penalties, implying that ECB pressure is leading to results for most firms.

European regulations require banks to assess whether they are – or will be – exposed to material risks, and that they reflect that in their capital reserves. The ECB has said lenders typically need to understand all the relevant drivers of climate and environmental-related risk and how these are affected given their exposures.

The rigour with which the ECB is pushing banks to manage their climate risk stands in contrast to the approach taken by the Federal Reserve, with chairman Jerome Powell saying the Fed has “narrow, but important, responsibilities regarding climate-related financial risks”. Banks in Europe have warned that the schism in regulatory environments risks putting them at a competitive disadvantage to their US peers.

Frank Elderson, a member of the ECB’s executive board, has shown little inclination to slow down European efforts on climate. In a May 8 blog post, he wrote that “a materiality assessment is not just a ‘nice to have’ – knowing your risks is a precondition for being able to address them”.

While some banks have started to set aside capital to cover climate-related risks and improved their risk management, Elderson listed several deficiencies, including:

• Not considering all relevant risk categories.

• Focusing only on transitional risks and omitting physical risks, or only looking at a subset of geographic regions.

• Using a net approach rather than gross to identify risks, undermining banks’ ability to measure actual impact and plan for mitigation. BLOOMBERG