ECB: ‘Green Banks’ Lend Most to Polluters

Researchers at the European Central Bank (ECB) have discovered that commercial banks in the eurozone, which advertise themselves as environmentally responsible or ‘green’, actually contribute the most to new loans for significant polluters. In a published blog, the bank’s supervisor stated that commercial lenders who talk a lot about environmental protection issued approximately four percent more loans to the worst polluters than average banks.

The blog post follows a speech by ECB Executive Board member Frank Elderson in November, who leads the bank’s green efforts, in which he warned commercial banks to meet the ECB’s climate requirements by the end of 2024 — or face penalties for each day of non-compliance.

To be clear, it is not up to the ECB to tell banks whom they should or should not lend to, but failure to manage climate and environmental risks appropriately is no longer compatible with good risk management, he said.

The ECB has pressured commercial lenders for three years to enhance climate data disclosure and improve risk assessments. However, researchers found that most banks, even those claiming to be green, have failed to adapt their lending practices to the reality of global warming.

By analyzing ‘green’ disclosures from 101 systemically important banks in the eurozone and comparing them with new loans to environmentally polluting sectors between 2014 and 2022, they were able to ‘illuminate a serious disconnect between banking environmental information and their lending practices’.

They ‘arise because banks are reluctant to sever established lending relationships with borrowers that have a larger carbon footprint,’ the economists wrote.

Banks that present themselves as environmentally conscious have directed more funds into industries that pollute the environment. The claim by some banks that these loans have helped so-called ‘brown’ borrowers transition to greener technologies was unfounded, according to the ECB economist, as polluting companies have failed to reduce emissions or commit to voluntary emission targets.

Surprisingly, these banks also show reluctance to lend to companies that could potentially drive innovation in cleaner technologies, the researchers wrote.

Banks are increasing their exposure to climate risk by continuing to lend to polluters, which could result in losses further down the line, they add, concluding that banks continue to lend to large polluters to ‘keep borrowers afloat and avoid balance sheet losses,’ the blog concludes.

Reducing their exposure to these companies would minimize risk, but the blog’s authors concluded that there are not ‘sufficient incentives for banks to change their lending policies’.

With the announced penalties from the ECB, the ECB hopes to hold commercial lenders accountable for the climate and environmental risks of their lending practices in 2024.