The results of the EBA’s first climate risk-mapping pilot for banks are finally with us. At a high-level (and among others), these include:
- that more than half of banks’ exposures (58% of total non-SME corporate exposures to EU obligors – equating to ~EUR 1.36 trillion) are allocated to sectors that might be sensitive to transition risk (e.g. fossil fuels; utility; transportation; agriculture etc.);
- a first gauge of the ‘green asset ratio’ at an EU aggregated figure of ~7.9%. Stepping back, such measures might seem rather vacant at present, but could be turned into powerful tools down the line that pressure banks to reconsider the costs/benefits to financing certain types of business (e.g. if sustainable investors in the future choose to shun banks reporting lower ratios etc. - i.e. for effectively funding too high a proportion of ‘brown’ over ‘green’ assets);
- the key challenge (that is 'heard' across the financial industry – i.e. not limited to banks), being the general lack of available client data (which, where available, isn't always standardised nor necessarily reliable). To put this into context, the report claims that 80% of the banks involved in this pilot considered that the ability of their clients to provide Taxonomy-based information in 2022 is below 30%.
As regards next steps – the EBA plans to use the results and experiences from this pilot to feed into a wider discussion concerning the design of a climate risk stress test for the EU’s banking sector.
Overall - whilst the ‘green’ movement specific to banks remains in relatively primitive stages from an EU (and even more so, UK) regulatory perspective (absent certain pockets already caught e.g. by EU SFDR where engaging in activities such as portfolio management, investment advice etc.) – there is no question that banks should be placing this topic high on their agendas and asking themselves a host of questions, both inwards-looking (e.g. from a prudential perspective – to understand their exposures to climate risks; transition risks etc.) and outwards-looking (e.g. calibrating their appetite and ability to channel increasing levels of capital towards environmentally sustainable activities etc.).
A financial system that is sound and resilient to climate change related risks is key in facilitating a smooth transition to a low-carbon economy and mitigating the potentially disruptive impacts of environmental risks. Even though these risks may represent a long-term threat for financial stability, they are already starting to crystallise and could significantly increase in the short and medium term if no action is taken…