Banks told to brace for ECB fines after mismanaging climate risk

Though likely to be largely symbolic, the fines represent an historic step

Wed, 05 Jun, 2024 - 15:39

Nicholas Comfort and Cáit Caden

The European Central Bank (ECB) confirmed that it is preparing to fine a number of lenders after they failed to make adequate progress in addressing risks posed to their business by climate change.

“We have notified a few banks that, based on our current assessment, they have not met the interim milestones, which means they face the prospect of having to pay a so-called pecuniary penalty,” said Kerstin af Jochnick, a member of the ECB’s supervisory board.

The comments follow a report by Bloomberg last week, which stated that as many as four banks face fines after not meeting deadlines set by the ECB for assessing their exposure to climate risks.

Though likely to be largely symbolic in size, the fines represent an historic step and distinguish the ECB from the US Federal Reserve in its approach to addressing climate change.

Ms Jochnick said the process has yet to be concluded, according to a transcript of the interview published on the ECB’s website.

“Supervisors will need to assess the documents that banks submit and the total number of days that they might have failed to comply past the deadlines we gave them,” she said.

“This will form the basis for any potential penalty."

Meanwhile, the financial watchdog in Ireland published its second annual Climate-Related Financial Disclosures where it forecasted an increase to level of investment allocated to climate change-directed bonds.

The Central Bank said it expects the amount held in these bonds, known as green, social and sustainability (GSS) bonds, to reach €2bn by the end of 2024, up from €450m in 2020.

Central Bank’s investment assets, which stood at €450m at the end of 2020, increased further to reach €1.4bn at the end of 2023.

Our allocation to GSS bonds is expected to increase further as we have set a target allocation of €2bn GSS bonds by end-2024.

In the report, the regulator also pledged “to seek to deliver” more long-term investment returns in climate-change related bonds, “while safeguarding its stock of financial assets”.

“Climate-related risks are not considered a new risk category within this process, but rather an amplifying factor of existing categories such as credit and market risks, which are managed as part of our financial risk management framework,” the regulator said in its report.

At the end of 2023, the Central Bank held approximately €17bn of investment assets.