“The ECB’s approach is far from a decisive green policy”
The ECB issued a formal warning to European banks on Wednesday 2 November to better integrate climate risk by the end of 2024. Otherwise, the central bank may take enforcement action. But for economist Jezebel Couppey-Soubeyran, a lecturer at Paris 1 and a research adviser at the Veblen Institute, the approach is too partial and will not decarbonise banks’ balance sheets. The interview.
Challenges: ECB asks European banks to better integrate climate risk, what does this mean?
Jezebel Couppey-Subeyran: The ECB requests that the climate criterion be taken into account in the loans granted and the securities received. In the accepted approach, climate risk leads to financial risks that are not sufficiently taken into account in banking operations. This is an approach based on the financial risks posed by global warming to bank balance sheets. Therefore, banks need to evaluate them by the end of 2024 and change their balance sheets accordingly. The new rules should guide banks in this direction, but the logic of regulators right now is to demand more communication and transparency. They rely on market discipline: if banks are asked to be more transparent, especially on indicators such as carbon footprints, this will lead to them decarbonizing themselves. But it probably won’t.
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It won’t happen spontaneously, we need rules to decarbonize balance sheets. But the ECB’s approach is very partial. It not only looks at the financial risk that climate change poses for banks, but also that finance poses a problem for climate. What is needed is for banks to stop financing climate-damaging and biodiversity-destroying activities and to finance those that promote the transition. In fact, there is no provision in the current regulatory policy that goes in this direction. Today, nothing prohibits banks from financing coal, oil or all extractive activities. Not to mention the lack of consideration of biodiversity or water risks…
Has the ECB already issued similar warnings for other types of risk?
This form of warning is quite new. The ECB is starting to warn banks about their ability to withstand climate risk, warning they are not ready. In this logic, banks will have to increase their capital to prevent financial risks caused by global warming.
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The ECB threatens “compulsory measures” if this climate risk is not sufficiently integrated. Which one?
If the regulator considers that climate risk is not better integrated by banks by the end of 2024, it may require a capital increase. But it is not enough to see climate change in terms of the risk it represents to financial stability. The ecological crisis cannot be compared with the financial crisis. Therefore, banks will not be able to face climate change with a little more capital. The financial crisis, we can get out of it by preparing for it and resuming our activities. The ecological crisis progresses in a different way, with thresholds, with a measure of irreversibility. We have to prevent the crisis, we just have to prepare for it. For this, banks should be obliged to finance the transition and prevent the financing of things that hinder it.
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What would be effective measures for the transition of the financial sector then?
For example, the ECB could make the bank’s refinancing costs dependent on its contribution to the financing of the transition. In July, it announced it was greenlighting collateral requirements for refinancing. But it would be more interesting to change the refinancing rate according to the carbon criteria. To truly decarbonize banks’ balance sheets, stronger regulations would be needed to prevent them from financing any new extractive projects (coal, oil, etc.) and off-balance sheet assets with excessive carbon intensity through a system of off-balance sheets (transfers). debts and financial assets to the external structure; editor’s note). They only buy securities of companies that are operating in line with a low-carbon trajectory or are in transition to achieve it. We are still a long way from a decisive greenback policy and banking regulation.