The European Central Bank (ECB) is reportedly prepared to take action beyond fines against banks that are unwilling to reckon with their exposure to climate risk
Frank Elderson, executive board member of the ECB, said at the ongoing COP28 climate summit that if “[the fines] are not effective, we can move up the escalation ladder”, according to Bloomberg.
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While it is unknown what this escalation would entail, it gives a clear indication that the ECB is serious in its mission to force banks to acknowledge the dangers of climate change to their sector. Last month (24 November), it was reported that 20 European lenders had been given deadlines to improve their preparations on the matter or face daily fines that could reach 5% of yearly revenue.
What is “climate risk”?
When climate change is discussed by businesses and governments, the focus is often on the environmental destruction and loss of life that it will lead to. For the banking world, however, climate risk is all about stability. As the planet heats – and governments ramp up measures designed to prevent it heating further – investments in fossil-fuel-heavy industries become less likely to pay off.
Much as the 2008 financial crash was sparked by overinvestment in the supposedly unshakable housing market, banks that ignore climate change could face losses that ripple throughout the economy. Banks continue to invest heavily in fossil fuels and other heavily polluting industries, pumping at least $4.6trn into fossil fuel companies between 2016 and 2022.
Elderson has previously highlighted another potential issue arising from the climate crisis: climate-based litigation. In a speech at the ECB Legal Conference in September he told attendees that “litigants are coming after the banks, come hell or high water. And the banks need to be prepared.”
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By GlobalDataHe went on to say that climate activists are increasingly filing suits against corporations for breach of corporate due diligence and greenwashing alongside innovative strategies such as buying shares in companies to hold the directors accountable under fiduciary responsibility for failing to adapt to the climate crisis.
The impact of these lawsuits may not be felt immediately, but as more global precedent is set, it could cause serious issues for banks that remain focused on carbon-heavy investments.
There is increasing global recognition of the issue, too. International banking consortium the Basel Committee recently released a draft proposal that would require banks to disclose their level of exposure to climate risk with sectoral and regional breakdowns.
Despite regulator pressure, however, financial services providers in five major economies spent over three times less on environment-related deals this year than in 2021, according to GlobalData.
Our signals coverage is powered by GlobalData’s Thematic Engine, which tags millions of data items across six alternative datasets — patents, jobs, deals, company filings, social media mentions and news — to themes, sectors and companies. These signals enhance our predictive capabilities, helping us to identify the most disruptive threats across each of the sectors we cover and the companies best placed to succeed.
