Banks in Europe will be asked to assess and then disclose the climate related risks of their lending portfolio by European Central Bank (ECB). This measure by the central bank of the European Union could also prompt EU based banks to tale on greater responsibility in lending to and for financing those projects and companies that are deemed to be environmentally damaging, the ECB said in a statement.
According to the ECB president Christine Lagarde, this measure that will be taken by up by the central bank is aimed at addressing the issues of climate change which was described by her as “mission critical” for the ECB. This will be implemented through a number of means which include doing this via the supervisory arm of the ECB that is tasked with conducting oversight of the biggest banks of the 19-country currency union.
All information and data related to the exposure of the banks in Europe to their climate-related and environmental risks will have to be made public and disclosed, said that ECB in a guide put up for consultation throughout the banking industry in the continent. The guide further states that bank should also mandatorily include such risk based exposures in their risk framework.
The other proposals by the ECB include making bank assigning themselves management responsibility to tackle the issue of climate related risks of loans and investments and the necessity of the lenders to evaluate and weigh such environment related risks while creating and devising their business strategies. The ECN also wants European lenders to mandatorily take into consideration the reputational risk that they face by the banks associating themselves with sectors and businesses that are deemed to be polluting the environment.
“Reputational risks can arise quickly and can rapidly affect firms,” the ECB said. “Institutions associated with social or environmental controversies … could face reputational risks as a result of changing market sentiment in relation to environmental and climate-related risks.”
The ECB expects to get the new guidelines ratified and finalized by the end of the current year and then wants the lenders of the region to immediately comply with the new guidelines and the ECN will question the banks and ask for their explanation about any deviations from the guidelines starting next year.
However the ECB does not initially plan to impose any sanctions on the lenders and banks for non-compliance. That would include additional capital requirements as part of the ECB’s regular Supervisory Review and Evaluation Process, the ECB said.
Consultation on the new ECB guidelines ends on September 25 this year.
(Adapted from Reuters.com)