Euro zone banks heavily exposed to dirtiest industries, ECB says

FRANKFURT (Reuters) – Euro zone banks are heavily exposed to carbon-intensive industries and face significant climate-change related risks so they must start to build capacity now to manage these, European Central Bank supervisor Andrea Enria said on Wednesday.

Wanting banks to take greater responsibility for their lending, the ECB has asked banks to start publicly disclosing data on their climate-related and environmental risks and told them to include these factors in longer-term business strategy.

“An abrupt transition to a low-carbon economy would have a severe impact on climate-sensitive economic sectors, triggering an increase in banking system losses of up to 60% compared with a baseline scenario,” Enria said in a speech.

“On average, 15% of significant institutions’ exposures are to the most carbon-intensive firms, Enria added, referring to Europe’s biggest banks, which are directly supervised by the ECB.

The problem is that climate risk tends to materialize over the long term while banks typically look at risks over the coming year and regulatory requirements reinforce this short-sighted approach, Enria added.

Although the ECB has said fighting climate change is “mission critical”, the bank has faced criticism over its corporate bond purchases which include billions of euros of debt of the most polluting firms.

But the bank said excluding firms from bond buys based on their activity is beyond the realm of monetary policy and would thus exceed its mandate.