Triodos Bank appreciates that the ECB is addressing these risks following the adoption of the Paris Agreement on climate change and the 2030 Agenda for Sustainable Development of the United Nations. The financial sector needs to play a key role in re-allocating money from harmful to sustainable initiatives. With its guide, the ECB wants to ensure that this transition also serves financial stability and the longer-term soundness of financial institutions.
Tool for supervisors
The guide is a useful tool for European supervisors of financial institutions, that must assess any risk a bank may be exposed to (according to article 97(1) CRD). Although the ECB writes that this guide is not binding for financial institutions, but rather serves as a basis for supervisory dialogue, Triodos Bank encourages supervisors to apply it in supervisory dialogues as soon as possible.
All banks should assess climate risk
The ECB wants to start with the requirement for the largest financial institutions to assess their impact on climate and the environment. Triodos Bank feels, however, that more action is needed to combat the climate emergency and would like to see all financial institutions assessing their most material risks for the climate, for example the financed greenhouse gas emissions of their lending and investment portfolios.
Triodos Bank advises to focus on harmful portfolios first; less harmful activities can follow later based on more concrete requirements. We also encourage the ECB to require banks to publish their actual financed emissions, following the example set by banks that use the carbon measure methodology of the Partnership for Carbon Accounting Financials (PCAF).
Phasing out harmful activities
riodos Bank acknowledges the complexity of assessing the climate impact on the risks of outstanding portfolios. Simplifying the process of integrating sustainability factors into risk management is possible by requiring banks to start divesting harmful activities with the goal of a – at least - 55% reduction of CO2 emissions by 2030. Triodos Bank advocates applying a capital add-on for activities that harm the climate and do not contribute to a reduction of CO2 emissions.
You can find Triodos Bank's detailed response here.