EU banking sector misaligned with climate risk reduction objectives

Posted on February 3, 2024 by Editor

The European Banking Authority (EBA) recently published a report highlighting the risks posed to banks due to the misalignment of financing portfolios with EU climate objectives. The transition toward a decarbonised economy introduces significant risks affecting credit portfolios, operational, market, and liquidity risks for financial institutions.

The report emphasises that corporations in energy-intensive or CO2-intensive sectors may face reduced competitiveness, particularly those slow to adapt to a decarbonised economy. With the possibility of an abrupt transition and significant regulatory changes on the table, high-carbon entities could be facing high risks.

EBA aims to to quantify the transition risks by calculating the difference between a corporation’s production projection and EU decarbonisation targets. It found almost all EU banks – 90% – to be out of alignment, with a concerning 70% facing elevated risk.

The report argues for alignment assessment as a valuable tool for banks to identify clients with the greatest transition risks. Banks within the scope of EBA ITS on Pillar 3 disclosures on environmental, social, and governance (ESG) risks must disclose the alignment of their credit portfolios by the end of 2024.

The EU’s sustainability reporting requirements, such as the upcoming CSRD, are aimed at setting enterprises on the path to net-zero. Along with alignment reporting, increasingly enhanced, digital ESG reporting in general in Europe will help banks and other investors understand the climate impact of entities.

For more details, explore the full report here.

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