ECB warns banks of fines over poor climate risk management

The European Central Bank (ECB) has issued warnings to roughly 20 banks regarding potential fines for insufficient climate risk management practices. These financial institutions have been given deadlines, such as the end of March, to implement necessary improvements or face periodic penalty payments. Should the banks fail to comply, they could face penalties amounting to as much as 5% of their average daily revenue, exercising the ECB’s enforcement authority.

This move follows a prior indication by the ECB in September 2023 that it might levy fines rather than capital surcharges on banks overlooking the financial risks from climate change. These risks include extreme weather events and the potential impacts from clients with substantial carbon footprints.

In addition, last month, the European Banking Authority announced plans to update the capital requirements framework to better incorporate environmental, social, and governance (ESG) factors into banking regulations.

Adding to the regulatory pressure, Frank Elderson, a member of the ECB’s Executive Board, criticized certain banks for not meeting a March deadline set earlier this year. The deadline was for conducting comprehensive materiality assessments of their portfolios’ exposure to climate and environmental risks. The ECB is now mandating corrective actions by the new deadlines to ensure that banks adequately manage and mitigate potential climate-related financial risks.

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