The European Central Bank is embedding climate risk into regular re
views 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 busin
ss-as-usual way, climate change and nature-related risks” in the ECB’s methodology for its so-called Supervisory Re
view and Evaluation Process, Patrick Amis, director general for sp
ecialized institutions and less significant institutions, said in an interview.
Banks’ SREP scores, which are used by the ECB to help determine ind
ividual capital needs (also known as Pillar 2 requirements), have in “a few cases” already been influenced by climate-relat
ed topics, he said, without naming the institutions affected.
The Bank of England has set a July 30 deadline to respond to its proposals for how banks and insurers sho
uld manage the physical and transition risks of climate change.
The ECB is moving faster than other central banks in treating
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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 cli
mate isn’t “something that we are spending a lot of time and energy on.”
Federal Reserve Chairman Jerome Powell; photo credit: Ting Shen/Bloomberg
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 r
etreat by US financial institutions from net zero alliances. That in turn h
as 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 JPMorg
an 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.