The European Central Bank (ECB)’s climate-related supervision has already led to an improvement in banks’ risk exposure and management, and increased capital allocation towards green finance, according to researchers at the central bank.
Environmental Finance reports that the researchers observed “significant impacts” in these areas among large EU banks, attributing these changes to the ECB’s supervisory efforts, including its 2020 Guide on climate and environmental risks, its risk management expectations for banks, and its 2022 climate risk stress test.
Their conclusions were drawn from assessing the impact of the ECB’s climate-risk-related supervision from 2020 on large banks’ climate risk ratings from Bloomberg, as well as banks’ issuance of green bonds, their ‘ESG AUM,’ and their lending to ‘green versus brown’ debtors.
The researchers adapted their methodology to control for any actions taken by the banks in the sample between 2015 and 2020, they write.
The authors reported stronger positive impacts on green lending and risk exposure reduction compared to increases in ‘ESG assets under management (AUM)’ and green bond issuance.
The findings suggest that as banks gain more information due to climate-risk-related supervisory efforts, their capabilities improve.
Anticipating future climate risk-related capital requirements, banks begin focusing on reducing their climate risk exposure and increasing green capital allocation, the authors state.
However, the paper does not assess whether large banks have met the ECB’s expectations, which they must meet by the end of this year or face penalties.
The authors acknowledge data quality and availability issues, including potential greenwashing, but express confidence in their results, which cover the 113 largest ‘significant banks’ directly supervised by the ECB and subject to its climate risk management expectations.
The views in the paper do not necessarily reflect those of the ECB or the Single Supervisory Mechanism network of EU national supervisors, but are those of ECB researchers Lena Schreiner and Andreas Beyer.
They recommend that supervisory authorities continue these efforts due to their positive effect on banks’ risk reduction, a core mandate of supervisory authorities.
“It is important to announce the continuation early on, since we have seen that the expectation of climate risk-related supervisory efforts already leads to positive effects,” they write.
Additionally, policymakers, regulators, and supervisory authorities should focus on improving climate risk-related data availability, data quality, and standardization of indicators.
While the paper emphasises the ‘soft transmission mechanism’ initiated by the ECB, which enhances information, capabilities, and signaling effects, the authors note that introducing a ‘green supporting factor’ or ‘brown penalising factor’ could further spur the transition, though it might face political resistance that could hinder its implementation.
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