Europe’s banking regulator has issued new guidelines mandating that lenders across the bloc must rigorously and consistently assess environmental, social, and governance (ESG) risks, citing growing threats to financial stability stemming from these factors, Bloomberg reports.
The European Banking Authority (EBA) emphasized that these risks, particularly environmental hazards such as climate change and its effects, can impact traditional financial risks and endanger the health of financial institutions.
The move comes amid a surge in insured losses globally from natural disasters, which were more than double the 30-year average in the previous year. The EBA also highlighted the increasing threat of legal action against financial institutions by climate activists, signaling a growing need for proactive risk management. Recent fires in Los Angeles further underscore the potential for increased environmental damages and disruptions.
The guidelines highlight a growing divergence in how US and European banks are approaching climate change. While major Wall Street lenders have recently withdrawn from the Net-Zero Banking Alliance, European banks have reaffirmed their commitment to reducing emissions.
The new EBA guidelines, developed over several months, demand that banks conduct long-term ESG risk assessments, looking at least ten years into the future. Lenders are also required to analyze their customers’ reliance on fossil fuels and scrutinize their net-zero transition plans.
Furthermore, the regulator is pushing banks to disclose potential financial risks associated with clients not aligned with the 2050 net-zero emissions target. This includes calculating the capital needed to absorb potential losses stemming from these risks and preparing for environmental-related litigation.
European regulators have been steadily increasing ESG disclosure and risk-preparedness requirements.
