ECB study finds: Bank Lending Favours Polluting Sectors

The ECB report was released immediately following the COP28 conference in Dubai, where a landmark call to transition away from fossil fuels was made. This marked the first instance in which a UN climate summit concluded by addressing the primary cause of the climate crisis.

The report, co-authored by the ECB and the European Systemic Risk Board, asserts that banks play a crucial role in mitigating the financial stability risk associated with emissions. It emphasizes that high-emitting sectors are disproportionately represented in the portfolios of banks. The report introduces the possibility of penalizing banks whose assets raise concerns about climate change, aiming to align the financial system with the transition to greener energy. In addition to existing regulations that mandate banks to hold capital to guard against loan-related risks, as witnessed during the 2008 financial crisis, this proposal adds a layer of accountability for environmental considerations.

The report proposes leveraging the systemic risk buffer, an established policy tool, to impose additional capital requirements with an environmental focus. This would essentially raise the costs associated with issuing loans to oil companies or providing mortgages for properties prone to flooding.

Frank Elderson, the ECB banking supervisor, has already indicated the potential imposition of financial penalties on banks for each day they neglect to consider climate risk. These recent findings have garnered support from advocates of responsible investment, signaling a positive step toward encouraging environmentally conscious financial practices.