The banking supervisors at the European Central Bank (ECB) are dissatisfied with the banks when it comes to dealing with climate and environmental risks.

For this reason, on Wednesday, when a study on this topic was published, they set the institutes deadlines until the end of 2024 so that they can better assess the various forms of climate risk and also take them into account in their strategy and risk management.

Markus Fruehauf

Editor in Business.

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"The glass is slowly filling, but it's not even half full," ECB Director Frank Elderson summed up the investigation in his blog post on Wednesday.

The Deputy Head of ECB Banking Supervision recognizes the first steps in the banks, where dealing with climate risks is now an important issue at the top management levels.

But there is a difference between discussing the steps to be taken and actually taking action.

According to the Dutchman, the deficit in terms of what needs to be done is even greater.

Charges of 70 billion euros

In the study, the ECB supervisors examined 186 banks, which together have total assets of 25 trillion euros.

These included 107 large institutions directly supervised by the ECB.

From Germany, these include, for example, Deutsche Bank, Commerzbank, DZ Bank or state banks such as Helaba, BayernLB or LBBW.

In addition, 79 smaller institutes were examined, including the Volksbanken and savings banks in Germany.

In July, the ECB's first major climate stress test showed that the banks had to reckon with possible burdens of EUR 70 billion due to an increase in natural catastrophes and far-reaching changes in all sectors.

The supervisors have now come to the conclusion that 96 percent of the banks have gaps in the identification of climate risks.

They criticized the inadequate methods and the little specific information on climate and environmental risks.

Most corporate boards are unaware of how these risks would evolve over time, what level of risk the bank could accept, and what actions should be taken, Elderson said.

Intermediate goals are missing

While there are many references to climate change in most banks' strategic plans, there is a lack of guidance on the impact on revenue streams.

Even if the institutes are very interested in making their business more sustainable and are discussing the transition with the companies, it remains unclear how they intend to protect their business models from climate damage in the coming years.

As an example, Elderson pointed to the many banks that have committed to be net zero by 2050.

However, they often could not explain this goal and set themselves corresponding intermediate goals.

Elderson is also dissatisfied with the responses many banks have given to how they plan to deal with customers who do not have sustainable revenue streams.

"Many banks hope for the best without preparing for the worst," he wrote in his blog post.

He also criticizes the poor implementation of green guidelines.

In their business policy, banks would stipulate strict handling of companies that exhibited particularly high climate risks.

At the same time, they exempt companies with high CO2 emissions from these requirements in some cases.

Because of these shortcomings, the ECB supervisors are now increasing the pressure on the banks.

They must implement these requirements in three steps by the end of 2024.

By March 2023, banks should be able to adequately categorize climate and environmental risks and assess their impact on their own business.

By the end of 2023, supervisors expect banks to integrate climate and environmental risks into governance, strategy and risk management.

The supervisors are primarily concerned with the banks setting concrete interim targets that are in line with their long-term sustainability strategy.

By the end of 2024, according to ECB supervision, all banks should meet all regulatory expectations with regard to climate and environmental risks.

This includes the integration of these risks into the internal processes for capital requirements and regular stress tests.

Deadlines would be followed very closely and regulatory action would be taken where necessary, Elderson warned banks.