ECB threatens 20 banks with fines after climate-risk warning

The European Central Bank has warned about 20 lenders that it will impose fines unless they address shortcomings in their management of climate risk, according to people familiar with the matter.

In letters sent this month and last, the ECB has given the banks individual deadlines, such as the end of March, to fix the issues it identified, the people said, asking not to be named discussing private deliberations. The so-called periodic penalty payments mark an escalation as the ECB’s patience with laggards wears thin, they said.

An ECB spokeswoman declined to comment.

The ECB has repeatedly warned that lenders aren’t 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. In an interview with Bloomberg in September, the central bank’s top oversight official said penalties are increasingly becoming a preferred tool to enforce compliance in some areas, referring to such measures as a “hammer” that would be “brought down” on banks.

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The fines now threatened by the ECB would rack up every day and can amount to 5 per cent of their daily average revenue. For a bank with annual revenue of €10 billion, for example, that would suggest daily penalties of as much as €1.4 million.

It’s the latest sign that authorities in the European Union are stepping up pressure on the financial industry to improve its handling of environmental, social and governance risks. Last month, the European Banking Authority said it was revising the framework that sets industry-wide capital requirements to better incorporate ESG.

The ECB, which aside from setting interest rates is also responsible for banking oversight in the euro zone, has a number of levers at its disposal. These include enforcement powers that can continue for up to six months, if a bank doesn’t appropriately address the original infringement, according to its website.

The severity of the shortcomings observed by the ECB varies across banks, and it’s unlikely that all of them will get hit by penalties, the people familiar with the matter said.

The ECB directly oversees the 109 most systemically significant banks in Europe, including six in Ireland – AIB, Bank of Ireland, Ulster Bank, Barclays Bank Ireland, Citibank Holdings Ireland and Bank of America Europe. National authorities handle the day-to-day supervision of smaller lenders.

ECB executive board member Frank Elderson said in a speech this month that “a number of banks have not delivered” on an interim deadline set for March of this year.

He cited the example of lenders that “haven’t yet performed an adequate materiality assessment” of the impact of climate and environmental risks across their portfolios, which he described as “the basic starting point for managing any type of risk”.

Such warnings come as other studies show European banks are falling behind in meeting green financing goals. An analysis by ShareAction, a UK-based non-profit that examined the green finance claims of the 20 biggest lenders spread across the EU, the UK, Switzerland and Norway, found that “targets and disclosures aren’t fit for purpose and could lead to misleading claims”. – Bloomberg