European Central Bank’s Frank Elderson expressed his disappointment in European banks’ progress on addressing climate risk during a keynote speech on 14 November 2023, during a conference on sustainable finance organised in collaboration with QED. Elderson noted that despite making some headway, “none of the banks under our supervision fully meet all our expectations” in relation to the ECB’s climate-related and environmental risk standards established in 2020.
As a result of this shortfall, the ECB has initiated enforcement actions against banks that are not adequately managing these risks, according to Elderson, who is a member of the ECB executive board and the vice chair of its supervisory board.
Elderson argued that climate scientists have warned a global temperature rise of two degrees Celsius above pre-industrial levels could lead to catastrophic weather events and ecosystem degradation.
Global commitments and sustainable finance
Elderson highlighted that global leaders, through the Paris Agreement, committed to staying well below the two-degree threshold. He also recalled his involvement in the high-level expert group on sustainable finance in 2018, which focused on recommendations for sustainable finance. Despite efforts, Elderson expressed concern that humanity might not stay below the 2°C threshold of global heating.
I am sorry to say that it is not at all certain that humankind will remain below that disastrous threshold of two degrees of global heating.
The European Union has transposed the Paris Agreement into the European climate law, targeting climate neutrality by 2050, with interim emission reduction objectives for 2030 and 2040. The EU’s Fit for 55 strategy reinforces a commitment to reduce emissions by 55% by 2030. Under its REPowerEU plan, the EU aims to end dependence on Russian fossil fuels well before 2030, noted Elderson.
The European Commission estimates that an average annual investment of €1.25trn is required from 2021 to 2030 to meet these objectives, and this figure represents a two-thirds increase, or an additional €500bn annually, compared to the previous decade.
Elderson stressed that capital markets in the EU are not yet fully supporting the green transition, pointing to the need for harmonisation and development. He highlighted the ‘greenium’--a premium for green assets--in financial markets.
Emphasising the need for regulatory and legislative consistency across sectors, Elderson suggested that financial undertakings should align with other companies in terms of sustainability obligations, particularly under the corporate sustainability due diligence directive.
He underscored the importance of the public sector through investment, co-financing and guarantees. The success of the EU’s climate objectives will depend on the effective implementation of member states’ recovery and resilience plans, part of the next generation EU programme, stated Elderson.
Insurance and economic risk
Elderson highlighted a recent ECB discussion paper, noting only about 25% of climate-related catastrophe losses in the EU are insured, which risks economic and fiscal stability.
He stated that despite banks beginning to address climate and environmental risks, none fully meet the 2020 ECB expectations. He emphasised the importance of aligning with the capital requirements directive and managing these risks effectively by the end of 2024, with interim deadlines. Elderson remarked on the failure of several banks to meet the March 2023 interim deadline, particularly in adequately assessing the materiality of climate-related and environmental risks.
“Therefore, it should come as no surprise that we have started to adopt enforcement measures,” Elderson stated, referring to binding supervisory decisions and potential periodic penalty payments for non-compliance. “In other words, we have told those banks to remedy the shortcoming by a certain date and, if they don’t comply, they will have to pay a penalty for every day the shortcoming remains unresolved,” warned Elderson.
Elderson concluded his speech by stressing the need for accelerated efforts. With current policies, global temperatures are set to rise by 3.2°C, far exceeding the Paris Agreement’s goals. He called for meaningful, urgent and effective action to build on recent foundations and meet the objectives.