The imbalance of international ESG regulation is making it difficult for European banks to compete with other jurisdictions like the US and more international cooperation would make it easier for global banks to do business, the European Banking Federation told Green Central Banking.
A difference in policies across jurisdictions is impacting how banks do business, said Denisa Avermaete, senior policy advisor for sustainable finance at the European Banking Federation.
As it stands, many rules around climate change risk are coming from the EU, and international regulators like the Basel Committee are playing catchup. This creates different approaches as to how risk and losses need to be accounted for by banks operating in different regions, she said.
“Here in Europe, we are applying the principle of double materiality, so not just the financial impact of ESG or climate-related matters, but also the impact that we produce in the environment. Whereas in the US, it’s typically only the financial impact,” said Avermaete.
The European Central Bank (ECB) has been pushing more policies related to climate change risk, as its secondary mandate of supporting EU policies includes the transition to a net-zero economy. Last year, the ECB warned 20 banks they could be fined if they fail to address their climate risk shortcomings.
The central bank has also said it plans to expand its commitment to combating climate change. And research from the ECB found that most of the eurozone’s big banks are not decarbonising their portfolios and face elevated transition risks.
In the US, Federal Reserve chair Jerome Powell has said the central bank is not a climate policymaker, while the US Security and Exchange Commission’s (SEC) recently announced climate disclosure rules have been put on pause due to a barrage of lawsuits.
“The fact that it goes [in] the other direction raises the problem of fragmentation in the regulatory and supervisory space,” said Avermaete.
But the ECB’s regulation around climate risks isn’t just an EU phenomenon, said Nathan de Arriba-Sellier, director of the Erasmus Platform for Sustainable Value Creation at Rotterdam School of Management.
“Europe is more stringent, but what it requires is more risk management. It doesn’t require divestment of any kind or things like that. It requires banks to be more sensitive to potential material ESG risks. So, in this respect [it] is just basic, good risk management,” he said.
Is climate risk a systemic risk?
At the heart of the issue is whether or not regulators consider climate change a systemic risk to the global financial system. Many economists and advocates say it is, and with finance being such a globalised sector, a bank’s climate risk can impact economies around the world.
Building capital buffers against potential climate change risk is one way to help mitigate against climate systemic risk, said Uuree Batsaikhan, head of research at Positive Money.
This will mean that when a climate crisis hits, the global financial system will already have a response mechanism in place, “unlike the global financial crisis which completely swept us off our feet and the carpet was pulled under us,” she said.
If banks do not have to create climate change risk buffers, it will create the impression that they will be bailed out if there is another crisis and “they’re not going to do anything about climate”.
“I think that’s a very big lesson we learned from the financial crisis. You need to push them to do something proactively; otherwise, it’s going to be very, very, very costly for everybody,” she said.
Rens van Tilburg, director of the Sustainable Finance Lab at Utrecht University, said that with more climate-related disasters each year, it’s only natural that there are more climate policies.
“It could very well be that in a couple of years, we will see that a lot of the American banks are actually getting into some financial problems because they have not taken precautions [and] stepped too much into these high-risk carbon loans and then [the EU] will be very happy that we didn’t go that way,” he said.
Arriba-Sellier said banks should also adopt transition plans to ensure they are not irrelevant to a new green economy. He said that while banks might not like all of these new rules and regulations, it is part of a supervisor’s job to ensure financial institutions do not become complicit.
“It’s not good news for some banks that prefer business as usual, but unfortunately… the train has left the business-as-usual station quite some time ago and it is a matter of now acting decisively,” he said.
But European banks are largely against a systemic climate risk buffer, because they say there is not enough data and information on the micro level to accurately account for risks. Having a climate risk buffer could cause banks to double count the same risk, said Avermaete.
The EBF says it is not just up to financial institutions to facilitate the transition to a green economy, but on governments and society as a whole to change how the economy operates.
“We cannot be the only ones promoting the transition and then being the police of companies in other sectors so that they have to do their job,” said Avermaete.
She said that while many EU banks do have policies to finance the green transition, ultimately, they are just trying to finance the real economy and can’t force companies to adopt greener policies.
Still, some banks have chosen to stop relationships with some customers because they are not responsive enough about transitioning, and while Avermaete said this is unlikely to be a massive shift, “clients should be prepared for these discussions with the banks, because this will happen more and more”.
This page was last updated May 16, 2024
