DBRS: EU banks must expect regulatory measures to protect the climate

“We believe this could be a turning point for regulators in their mission to hold banks more accountable for their (climate and environmental) risks,” the report said.

The prospect of increased enforcement action arises from various actions taken by regulators — including stress tests, thematic compliance reviews and self-assessment exercises – which revealed banks’ inaction on their climate-related risks.

“The ECB concluded earlier this year that many banks are still lagging behind in terms of the availability and quality of ESG disclosures,” it said. It also noted that a A recent study of 95 major European banks found that over 90% of banks had corporate portfolios (credit and investment banking) that were inconsistent with their climate commitments and that 70% of banks were therefore exposed to increased legal risk.

The physical impacts of climate change are also worsening, the report says.

“In Europe, floods, droughts and heatwaves have already started to cause significant financial damage,” the report says. In Slovenia, floods caused damage amounting to 16 percent of the country’s GDP last year.

Against this background, DBRS expects banking supervisors to take a stricter stance towards banks and their climate-related regulatory obligations.

“In our view, European regulators’ tolerance of banks’ engagement with climate-related risks is likely to continue to narrow,” the report says.

In addition to fines, this could also mean an increase in capital buffers and a restriction on dividend payments for banks that do not meet their requirements, it said.

“Although these measures seem unlikely for now, we expect that the ECB’s recent signals that it will tighten penalties for defaulting banks will mark the beginning of a phase in which authorities flex their regulatory muscles,” the report said.