EU: ECB threatens to fine banks that lag behind on managing climate change risks

The European Central Bank (ECB) will impose financial penalties on banks that take too long to address climate change risks in their business, according to Frank Elderson (Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB), in a keynote speech delivered on 14 November 2023. 

Interim deadlines missed

In November 2020, the ECB published its guide setting out its supervisory expectations for banks to identify and manage climate and environmental (C&E) risks as part of their governance, strategy and overall risk management by the deadline of the end of 2024, as required under the Capital Requirements Directive (CRD). The ECB has repeatedly urged banks to manage C&E risks just like any other material risk they are exposed to (see our earlier blog post).

In his speech, Mr Elderson stated that, whilst the ECB has seen a number of good practices, at present, none of the banks under the ECB’s supervision fully meets its expectations and that a number of banks have missed the ECB’s interim deadline of March 2023 to perform materiality assessment of the impact of C&E risks across their portfolios, which was considered “the basic starting point for managing any type of risk”.

Enforcement measures adopted

Mr Elderson explains that in line with what has been communicated many times in the past, the ECB has started to adopt enforcement measures and has “issued binding supervisory decisions, including the potential imposition of periodic penalty payments if banks fail on their requirements. In other words, we have told those banks to remedy the shortcoming by a certain date and, if they don’t comply, they will have to pay a penalty for every day the shortcoming remains unresolved.”

No indication was given as to how much the penalties could be or when they would commence.

Executives will be held to account for failing to manage C&E risks

Mr Elderson also warned that failing to adequately manage climate and environmental risks is no longer compatible with sound risk management and “increasingly calls into question the fitness and propriety of those in charge of establishing and steering banks’ practices”. 

He continued, “To manage their own risks, banks need to engage with their customers to gain a deep understanding of how they are being affected by the climate and environmental crises and how they will mitigate and adapt to the consequences. By failing to complete a proper materiality assessment, these banks are continuing to turn a blind eye to potential risks on their balance sheet”. 

The speech, ‘Making finance fit for Paris: achieving “negative splits”’ is available here.