(Bloomberg) — European banks could earn almost 6 billion euros ($6.6 billion) in annual revenue from financing the transition to a more sustainable economy, according to their top regulator.
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“The balance sheet choices banks will make about green and non-green assets will materially impact their bottom lines,” said Andrea Enria, who leads the European Central Bank’s supervisory board. “Consumers and investors will move away from banks if they disagree with their approach toward climate change and environmental challenges.”
The European Central Bank is pushing banks to prepare for losses they could face from extreme weather or the possibility of polluting companies going out of business as authorities seek to zero out carbon from the economy. Yet that transition is also a chance for lenders to boost their earnings, Enria said in a speech on Monday.
The additional revenue opportunity for listed European banks is based on the $2.3 trillion a year in financing that will be needed from global banks for the green transition, Enria said, citing an average of estimates for the funding needs.
He added that he finds it “a bit frustrating” that questions about the ECB’s approach to climate risk frequently focus on how these will ultimately be treated in capital requirements.
“It conveys the impression that banks would be moving in the direction indicated by their supervisors and properly capture relevant risks only if threatened with the big capital stick,” he said. “But it is clearly in the interests of the banks, before and even more so than in the interests of the community they serve, to take prompt action in this area.”
The ECB’s climate stress test and an in-depth review this year weren’t designed to raise capital charges and the main outcome will be reflected in qualitative recommendations, he said.
Still, “it might well be the case that serious shortcomings identified in governance or risk management practices may affect the banks’ scores, and therefore indirectly have a quantitative effect” on banks’ individually-tailored capital requirements, Enria said.
The ECB already issued a “relatively large number” of recommendations to banks last year on how they can address shortcomings in meeting its expectations for managing climate risk, Enria said. The ECB will “gradually step up the supervisory pressure on those banks lagging behind the industry’s best practices,” he added.
Enria also addressed the war in Ukraine, saying banks “need to make sure that they have strong internal processes and controls to avoid any breach” of related sanctions.
“Banks must be aware that actions which might amount to financing an illegal war condemned by the international community, or willingly profiting from breaches of international sanctions, run totally counter to good corporate citizenship,” he said. “In addition to governments and supervisors, consumers and investors will also have a say in this.”