ECB warns banks about dismissing climate risks

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The European Central Bank (ECB) has issued a warning to banks operating in the eurozone, threatening to impose financial penalties if they are slow to minimise climate change-related risks stemming from their activities. The ECB, overseeing banks in the 20-nation eurozone, has expressed concern that many banks are lagging in addressing climate-related and environmental risks. Frank Elderson, vice-chair of the supervisory board at ECB, noted that penalty payments would be imposed if banks fail to remedy the shortcomings by a specified date. The penalties could theoretically be as much as five percent of daily banking income.

The ECB had set a deadline for next year after finding major gaps in how banks were assessing their impact on climate change. Many banks had not met an interim deadline set for March of the previous year. In 2020, the ECB published recommendations on bank governance in terms of climate risk, including disclosing the percentage of carbon-related assets in each portfolio.

Elderson emphasised that failing to manage climate and environmental risks adequately is no longer compatible with sound risk management. He urged banks to engage with customers to understand how they are affected by climate and environmental crises and how they plan to mitigate and adapt to the consequences. Elderson highlighted the increasing threat of surpassing the two degrees Celsius mark in global heating and called for meaningful, urgent, and effective action ahead of the COP28 meeting on the environment.