ECB wants banks to assess, disclose climate risk

FILE PHOTO: European Central Bank President Christine Lagarde looks on during a debate on the 2018 annual report of the ECB, at the European Parliament in Strasbourg, France, February 11, 2020. REUTERS/Vincent Kessler//File Photo

FRANKFURT (Reuters) - The European Central Bank plans to ask lenders to assess and disclose their climate-related risks, it said on Wednesday, a step that may force banks to take greater responsibility for financing environmentally damaging sectors.

ECB President Christine Lagarde has said the bank will do its part in the fight against climate change, which she called “mission critical”, including through its supervisory arm, which oversees the 19-country currency union’s biggest lenders.

In a guide put up for industry-wide consultation, the ECB said banks must publicly disclose data on their climate-related and environmental risks and should explicitly include such exposures in their risk framework.

They also need to assign management responsibility to deal with climate-related risks, must weigh these risks when business strategy is devised and also need to consider the reputational risk involved in their association with polluting sectors.

“Reputational risks can arise quickly and can rapidly affect firms,” the ECB said. “Institutions associated with social or environmental controversies ... could face reputational risks as a result of changing market sentiment in relation to environmental and climate-related risks.”

The ECB wants banks to comply with the new guidelines as soon as they are finalised towards the end of the year and from next year will ask banks to explain any deviation.

But non-compliance will not initially trigger sanctions, including additional capital requirements as part of the ECB’s regular Supervisory Review and Evaluation Process, it said.

Consultation on the new ECB guidelines ends on Sept. 25.

Reporting by Balazs Koranyi; Editing by Catherine Evans