02 November 2022

SSM's Elderson: Banks need to be climate change proof

As supervisors, our role is to ensure that banks remain prudentially sound, now and long into the future. For this to happen, banks must be able to identify, assess, control and mitigate the inevitable risks materialising from the climate and environmental crises.

The economy needs stable banks, especially as it goes through the green transition Although banks have started to do this, there is a long way to go before they are climate change proof. We will therefore continue to scale up our supervisory activities. We expect banks to be able to fully manage their climate-related and environmental risks by the end of 2024.

Today we have published the results of our thematic review on these risks. We have closely examined banks’ strategies, governance and risk management practices. Together with 21 national competent authorities, we assessed 186 banks holding total assets of €25 trillion and took further actions to create the most comprehensive picture of how banks have been dealing with these risks.

The glass is not even half full

Simply put, the glass is filling up slowly but it is not yet even half full. Yes, climate change has made it to the top levels within banks and some first steps have been taken. But there is a difference between talking about steps and beginning to act; and there is an even bigger difference in doing what is needed. Here are three examples of shortcomings in risk identification, strategy and living up to commitments.

First, we detected blind spots at 96% of banks in their identification of climate-related and environmental risks in terms of key sectors, regions and risk drivers. Where banks do assess the risks, they are not yet able to grasp the full magnitude as most do not actively collect granular counterparty and asset-level data. And almost all boards are still unaware of how these risks will develop over time, what precise risk level the bank can accept and what action it will take to rein in excessive risk.

Second, most banks’ strategy documents are full of references to climate change, but actual shifts in revenue sources remain rare. Banks are certainly keen on new forms of sustainable business, and have plans to allocate more funds to them soon. Many are also phasing out specific activities, such as thermal coal power generation, and have started discussing the transition with their most carbon-intensive clients. However, it is too often still unclear how these initial steps shelter banks’ business models from the consequences of climate change and environmental degradation in the years to come. For instance, some banks have committed to reaching net-zero emissions by 2050 but fail to define “net zero” and fail to set interim targets. Such targets would allow banks to actively steer towards their commitments. That would bring them closer to reaching their goals on time.

Most banks have thus not yet answered the question of what they will do with clients who may no longer have sustainable revenue sources because of the green transition. In other words, too many banks are still hoping for the best while not preparing for the worst.

Third, more than half of banks have put policy frameworks in place or have made green commitments but have not put them into action. For instance, some banks have policies explaining how to deal with clients engaged in risky activities. However, when assessing real cases, we see that clients – even notorious polluters – have sometimes been exempted from these policies. We also find that certain banks have ignored clear warnings from their own specialists. These banks risk serious repercussions on their balance sheets, particularly where they publicly make “green” claims....

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