A study by the ECB has found 90% of banks’ loan portfolios are not aligned with global climate goals and the EU’s 2050 climate neutrality target.
According to ESG Today, this eye-opening report assessed the credit portfolios of 95 banks, representing 75% of euro area loans.
The ECB employed an ‘alignment assessment’ method, focusing on six carbon-intensive sectors — Power, Automotive, Oil & Gas, Steel, Coal, and Cement. These sectors are pivotal, as they account for 70% of global CO2 emissions. Remarkably, only 8 out of 95 banks had lending practices in line with the 2050 net zero pathway, exposing a significant transition risk for the majority. The risks predominantly stem from financing companies that are lagging in reducing high-carbon production capacities and in developing renewable energy sources.
Furthermore, the report highlighted the prevalence of reputational and litigation risks, impacting around 70% of banks. Despite 72 banks committing to net zero, a concerning 93% are yet to align their strategies and internal processes to achieve this objective. The report underlines the importance of aligning financing practices with the path to decarbonisation to avoid exacerbating climate-related risks.
The ECB’s study also sheds light on the nature and extent of these risks. While credit risks were less pronounced, with most banks having misalignments below €1 billion, a notable 14% had larger exposures, sometimes exceeding €10 billion. The report warns that misalignment could escalate rapidly if credit lines to these companies are fully utilised.
Banks’ exposure to misaligned companies is significantly higher than to those aligned, often more than double in size. The degree of misalignment varied across sectors, with earlier transition pathways showing greater misalignment. Notably, the automotive sector was highly misaligned, reflecting a lag in transitioning to electric vehicles.
Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board, emphasised the criticality of this issue, stating: “This is more relevant than ever, considering that climate litigation has skyrocketed in recent years. Globally, some 560 new cases have been filed since 2021 and increasingly also targeted at corporates and banks.”
He further added, “The economy needs stable banks particularly as it goes through the green transition. It is in turn crucial for banks to identify and measure the risks arising from the transition towards a decarbonised economy.”
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