Mobilising banks in the transition: supervisors must have better use of risk management

16 February 2024 - Foreword of the week - By : Romain HUBERT

The European Union is continuing its efforts to ensure that the banking system takes climate change into account. Banks will have to draw up a “transition plan”, according to the European Banking Authority’s (EBA) guidelines that are out for consultation until April.  One could hope that the banking authorities would seize this opportunity to encourage banks to better finance the transition, since their voluntary commitments are not sufficient. But the EBA does not make it a clear objective.


For the EBA, the explicit aim of these climate plans is to ensure that banks are resilient to the risks associated with the transition and climate impacts. Can we expect any benefit in terms of mobilising banks for climate action?


Not as it stands. The proposal simply asks banks to manage their exposure to financial risks linked to climate impacts and to the EU’s transition objectives. Typically, a bank will have to assess whether oil companies risk losing their ability to repay their loans because of the transition. And the answer may be no, if the bank thinks that one or more companies will be financially robust long enough to repay its loan, or if the bank considers that the transition scenarios generating the largest financial impacts are not very credible…


But still looking at it from the prudential perspective, which is a responsibility of the banking authorities, it would be in our interest to encourage the transition for the sake of risk management. The greatest risk to the financial system in Europe is above all the lack of a transition, which would lead to repetitve and unmanageable climate impacts that are still underestimated. The prudential authorities must therefore take up this objective, and the challenge is to define how. In particular, it will be necessary to remain consistent with governments’ action plans, while monitoring banks’ ability to take on risk to finance the transition. Transition plans should help!


In I4CE‘s newsletter of this week, you will discover our report which discusses the links between risk management and the mobilisation of the banking sector for the transition. You will also find our recommendations for strengthening the EBA’s proposal, and rethinking more broadly the link between prudential regulation and governments’ climate action.


Read the newsletter

To learn more
  • 07/05/2024 Foreword of the week
    After 5 years of the Green Deal, where is Europe on the road to decarbonisation?

    Following the European elections on June 9, the EU is adapting to a new, more conservative, political reality. Yet despite changing political tides, a new EU leadership will still need to find a credible answer to how the continent is to reach climate neutrality by 2050. To understand how to get there, we need a clear understanding of the progress already made. This is where the European Climate Neutrality Observatory (ECNO) comes in.

  • 06/28/2024
    From Stranded Assets to Assets-at-Risk: Reframing the narrative for European private financial institutions

    Private financial institutions must rethink their approach to managing stranded asset risks. The current narrative on quantifying fossil fuel sector exposures within a limited scope of financial portfolios (mostly loans) largely underestimates potential stranding losses. As the low-carbon transition impacts all economic sectors, private financial institutions (FIs) must consider material transition-driven stranding risks within their overall transition risk management framework using a ‘whole of economy’ lens. Traditional risk management approaches are ill-suited to the methodological and quantification challenges of transition-driven stranding risks, so a flexible, dynamic, forward-looking approach is necessary. Strong, incentivising public policy coordinated with financial regulatory and supervisory impetus is necessary to preemptively identify, monitor and manage stranding losses on ‘assets-at-risk’ (i.e., potential stranded assets). The ECB finds that 40% of the total loan portfolio of euro area banks is exposed to energy-intensive sectors*, making them vulnerable to transition risks, including stranding. It is time for an urgent reframing of the stranded asset narrative to avoid significant financial losses (endangering financial stability) and direct orderly transition finance flows to retire or transform assets-at-risk before they become fully stranded.

  • 04/25/2024
    I4CE’s recommendations to the European Banking Authority on prudential transition plans

    The European Banking Authority (EBA) is clarifying how the banks should frame their “transition plan” as required by the EU prudential regulation. The transition plan is the bank’s strategic roadmap to prepare for the transition to a sustainable economy as framed by the jurisdictions they operate in, including an EU climate-neutral economy. It has been introduced in several EU regulatory frameworks, including as a disclosure requirement arising from the CSRD. The prudential framework and the EBA are focusing on a specific angle: how the banks plan to manage their financial risks related to the transition. EBA’s framing of these plans will be key to determine whether the banks will manage their financial risks consistently with the broader need of financing the transition to a low-carbon economy. 

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