ECB finds 90% of EU banks are misaligned with Paris Agreement

The ECB also flags elevated litigation and reputational risks for banks that have publicly committed to decarbonise by 2050.

A vast majority of big eurozone banks are financing polluting companies that are not on track to be Paris-aligned over the next five years, according to analysis published by the European Central Bank (ECB) today.

This is the first time the European supervisor has measured the gap between bank credit portfolios and the Paris Agreement. It comes just days after the European Banking Authority announced that large EU banks will soon be expected to report this information.

The analysis, and its underlying methodology, is likely to become a key reference point for institutions seeking compliance with the new rules. Traditional prudential oversight has centred on historical financial information, which means there is not a significant body of best practice to draw on to develop forward-looking projections.

The paper’s approach was endorsed by the central bank’s executive board member Frank Elderson, who said that “banks can therefore make use of the methodology set out in our report to meet this disclosure requirement” in a blogpost also published today.

The ECB identified companies that are misaligned with the Paris Agreement by comparing each organisation’s emissions intensity or technology deployment over a five-year timeframe to what would be required under a net zero 2050 climate scenario developed by the International Energy Agency.

The analysis covered six carbon-intensive sectors: oil and gas, coal mining, power generation, automotive, steel, and cement. The study looked at 95 large EU banks, which were not identified by name, and their eurozone and non-eurozone clients.

Despite the headline findings, which were described as “striking” by the ECB, the study suggested that the three most misaligned banks had exposure of less than €50 million in total across the six sectors.

“Both the most aligned banks and the most misaligned banks have relatively small exposures, often involving just a few counterparties,” the ECB said.

“These banks can more readily adjust their alignment, either by extending credit to more aligned counterparties and engaging in constructive dialogue with a limited number of counterparties or adjusting their credit terms to encompass the transition risk.”

The report does not include exposures to other key transition sectors such as shipping and aviation, or exposures to households in the form of mortgages. The analysis also does not account for bank investment portfolios; facilitated emissions, which banks are responsible for through their capital market activities; or non-eurozone subsidiaries of the banks.

Elevated risks

The ECB warned that around 70 percent of the 95 banks assessed are subject to “elevated” litigation and reputational risk, as they have publicly committed to the Paris Agreement despite their misaligned portfolios.

Almost all banks are misaligned across the six sectors, according to the paper, with power generation emerging as the worst laggard due to fossil fuel-fired energy making up half of installed production capacity.

The cement and steel sectors have comparatively better alignment because they are subject to a less stringent decarbonisation pathway compared to sectors such as automotives, which will need to phase out combustion engines by 2035.

EU banks will have to report on the Paris-alignment of their exposures to aviation, maritime transport and chemicals to meet the incoming disclosure requirements, on top of the six sectors already analysed by the ECB paper.