ECB Speech on Climate Change and Central Banking

On November 27, the European Central Bank (“ECB“) published a speech by Yves Mersch, ECB executive board member, on climate change and central banking. Key points included:

  • Three principal sources of risk have been identified by the Financial Stability Board’s (“FSB“) taskforce on climate related financial disclosures, the European Systemic Risk Board and other bodies: (i) physical risk from exposure to climatic events; (ii) transition risk; and (iii) the undervaluation risk in new “green” financial products leading to price bubbles.
  • The physical risk falls mainly on insurers who need to ensure capital adequacy (the ECB is excluded from supervising insurance firms under the Treaty of the Functioning of the EU) but the banking sector may also be affected to the extent that climatic events affect the physical collateral underpinning lending, such risk is increased if banks have loan portfolios concentrated in particular geographic areas.
  • The ECB is not a regulator for financial markets or banks, so cannot vary the capital requirements of supervised banks to take into account their climate risks, or to encourage climate finance.
  • Climate risks have been identified in the ECB Banking Supervision’s risk assessment for 2019 and will be among the topics covered in the qualitative discussions held with banks on an individual basis.