As banks waver on climate plans, EU and ECB devise plan to keep them liable

Through a blog post from Executive Board member Frank Elderson, the European Central Bank warned on Monday that a majority of the lenders it oversees have not produced strategies to respond to climate change. This comes as the European Commission considers a new legal mechanism to ensure banks adopt transition plans for their businesses to become carbon neutral.

Andrew Karolyi, dean of the Cornell SC Johnson College of Business and a scholar specializing in international financial markets, says Monday’s critique of European banks is part of a chorus of criticisms aimed at financial institutions that have been slow to specify climate targets and action plans. Penalties such as capital requirement surcharges may be on the horizon, according to Karolyi.

Karolyi says:

“Since the 2019 launch of the United Nation’s Principles for Responsible Banking, a unique framework to ensure signatory bank’s strategies and practices align with the visions set out in the Sustainable Development Goals and the Paris Agreement, critics have regularly questioned whether actions have really been commensurate with the commitments. This week’s blog post by ECB Executive Board member Frank Elderson is one more such concern.

“The Principles do require significant acts from the signatories. They require constant evolving interactions from the banks and indirectly their customers. The problems are that too few have specified particular targets and areas of action.

“The Principles also require a substantial commitment to greater transparency in signatory bank disclosures on material actions. What ECB board member Elderson, among others, is proposing is to use the power of the ECB, the EU, and other banking regulators to mandate legal requirements for disclosures of such plans for meeting Paris Agreement targets. Or else additional penalties, including capital requirement surcharges, may very well be on the way.”

 

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