The European Central Bank is embedding climate risk into regular reviews of how well banks can absorb losses, marking a new chapter in its supervisory approach.
The intention is to “incorporate, more decisively and in a more business-as-usual way, climate change and nature-related risks” in the ECB’s methodology for its so-called Supervisory Review and Evaluation Process, Patrick Amis, director general for specialized institutions and less significant institutions, said in an interview.
Banks’ SREP scores, which are used by the ECB to help determine individual capital needs (also known as Pillar 2 requirements), have in “a few cases” already been influenced by climate-related topics, he said, without naming the institutions affected.
The ECB is moving faster than other central banks in treating the fallout from climate change as a financial risk that has the potential to threaten bank solvency. That’s in contrast to the Federal Reserve, with Chair Jerome Powell recently stating that climate isn’t “something that we are spending a lot of time and energy on.”
The different approaches reflect a growing divide in the US and Europe. The Trump administration’s hostility toward climate policies has already coincided with a mass retreat by US financial institutions from net zero alliances. That in turn has triggered backlash among European asset owners worried that their US mandate holders may be ignoring climate risks.
The development has meaningful implications for the flow of capital, with a recent report by analysts at JPMorgan Chase & Co. estimating that two-thirds of the world’s 100 largest asset owners are concerned about climate change.
The Trump administration, meanwhile, has threatened to take retaliatory action against European environmental regulations that affect US firms.
The ECB is adamant that such threats won’t weaken its resolve.
