The vast majority of European financial institutions fail to properly disclose climate risk exposure, according to the European Central Bank. 

A new damning report published by the European Central Bank (ECB) this March has revealed that most banks in the eurozone do not properly disclose their climate-related risk exposures. Half of banks have told the ECB they are exposed to such risks, but three out of four have not disclosed whether or not climate and environmental factors had a material impact on their risk profile. “This shows that these institutions are either unaware of the potential impact of the risks on their balance sheets or are aware of the impact but do not transparently disclose it,” says the report. Even for those that do disclose the materiality of these risks, the ECB notes disclosures are at high level and “do not show the full breadth of the underlying analysis”. None of the 109 banks under the ECB’s purview has met its climate disclosure expectations.

‘Banks can and must do much better’

The ECB believes there is no real justification for this lack of transparency, especially because of the growing standardization of climate risk measurement thanks to initiatives like the Task force on Climate-Related Financial Disclosures (TCFD). “The sheer speed at which regulation and metrics are developing in this field should leave no room for any doubt: addressing climate-related and environmental risks, and publishing good-quality disclosures, is not optional. Banks can and must do much better to improve the quality of their disclosures, and they need to do it quickly,” said Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB.

The ECB has since threatened to use “the full array of regulatory tools” at its disposal to ensure banks fall in line.

Scope 3 emissions

According to the report, almost 60% of banks do not disclose how transition or physical risks could affect their strategy, and only half of them publish key performance or risk indicators around climate and environmental risks. Additionally, though most banks have committed to align their strategy to the goals of the Paris Agreement, only one has explained in detail how it plans to do so.

Scope 3 financed emissions (coming from the customer operations banks finance through loans and other financial tools) are by far the largest share of banks’ carbon footprint, representing as much as 93% of their total Scope 1, 2 and 3 emissions. And yet, only 15% of banks disclose those, ignoring the ECB’s Guide on climate-related and environmental risks and the Greenhouse Gas Protocol.

The report does point to some improvements in banks’ disclosures compared to the previous assessment dating from 2020, but it is clear that much more needs to be done for the financial sector to play its part in fighting climate change.

ESG in real estate asset management

Certain market trends are set to improve banks’ environmental performance in the coming years. It is now becoming easier to calculate the carbon emissions of buildings: for instance, ClimateTrade offers a carbon footprint calculator for the real estate sector.

As a result, a ‘brown discount’ is being applied to buildings that fail to become more sustainable. This pressure is currently felt particularly in Europe and in the United Kingdom. For instance, a real estate representative cited a UK building valued at a certain price in 2020 suffered a price decrease of 30% in 2021, when the costs associated with the transition to net zero carbon were taken into account. This is much higher than  the value increase generated by the added value of already being net zero, the so-called ‘sustainable premium’, which stands between 5% and 12%.

In time, this trend is set to reduce the amount of real estate loans and investment for buildings that show poor environmental performance, reducing financial institutions’ scope 3 financed emissions.

Banks that are taking climate action

Despite the findings of the report, some financial institutions have begun to take action to offset their operational emissions: in Spain, ClimateTrade has helped Banco Santander, Banco Sabadell and other financial institutions calculate and offset their emissions by contributing to climate mitigation projects that also work towards the Sustainable Development Goals. Since our platform is based on blockchain technology, all transactions and carbon credits are fully traceable, making disclosures and reporting easier and more transparent.

We also have an alliance with risk consultancy N World Azentua to advise financial institutions on environmental action. To learn more about how ClimateTrade can do for the financial sector, contact us