ECB: Most European Banks Don’t Measure Climate Risk

Europe’s banks are not ready to deal with climate catastrophes, according to the continent’s central bank—and that could lead to losses of at least $71 billion for the eurozone’s largest lenders.

The economic ripple effect would be considerable, affecting businesses far and wide, the European Central Bank’s climate stress test concluded after a survey of 104 institutions in the European Union. North American pension funds and other asset allocators have considerable investments in Europe, which is also a major trading partner for the U.S. and Canada.

For more stories like this, sign up for the CIO Alert daily newsletter. 

The study comes as Europe endures a summer of extreme heat, scant rainfall and wildfires, a situation made worse by climbing energy prices and looming natural gas shortages stemming from the Russia-Ukraine war.

The ECB study reveals that some 60% of banks lack a climate risk stress-testing program. Further, 80% of them don’t factor in climate risk when making loans. In addition, just under two-thirds of banks’ earnings from nonfinancial corporate customers is provided by greenhouse-gas-heavy industries.

“Euro area banks must urgently step up efforts to measure and manage climate risk, closing the current data gaps and adopting good practices that are already present in the sector,” the ECB’s chief supervisor, Andrea Enria, said in a statement.

Europe has been far more ambitious in its climate regulation and oversight than has the U.S. For instance, earlier this year, the European Insurance and Occupational Pensions Authority conducted a stress test to gauge the resilience of the European Union’s pension funds during a climate emergency.

U.S. banks are further behind their European counterparts in “climate reporting and preparation” at financial institutions, Moody’s Analytics warned in a study last year.

In the U.S., S&P Global Ratings has begun to measure climate risk exposure when making credit ratings. Meanwhile, President Joe Biden has pledged to increase efforts to curb greenhouse gases, despite a recent Supreme Court decision limiting his authority to do that. His recently enacted climate and health care bill provides billions to promote a greener economy.