(Bloomberg) -- Europe’s financial regulator for banks said lenders in the bloc must regularly and comprehensively measure ESG risks, in new guidelines designed to shore up the industry amid growing threats to financial stability from environmental and social factors.
“ESG risks, in particular environmental risks through transition and physical risk drivers, pose challenges to the safety and soundness of institutions and may affect all traditional categories of financial risks to which they are exposed,” the European Banking Authority said in a statement on Thursday.
Banks should employ scenarios to identify, prepare for and mitigate potential risks from individual exposures as well as at a portfolio level and across industrial sectors, the EBA said. Particular consideration should be given to the fossil fuel industry, and measures should include quantitative targets for financed emissions.
The guidelines come as fresh data shows insured losses globally from natural catastrophes were more than double the 30-year average last year, with raging fires in Los Angeles suggesting more damage in 2025. At the same time, banks like other businesses increasingly face legal risks as climate activists leverage the courts.
Meanwhile, there’s a growing divide in how US and European banks tackle climate change. In the US, Wall Street’s biggest lenders just quit the Net-Zero Banking Alliance, while lenders from Europe say they remain committed.
Regulators and policymakers in Europe have been tightening requirements for disclosing and preparing for potential ESG risks. In its new guidelines, which have been months in the making, the EBA said banks should look at least 10 years into the future, assess customers’ dependency on fossil fuels, and review their net zero transition plans.
Banks should also report the potential financial risk impact from clients that aren’t aligned with net zero emissions by 2050; consider the amount of capital they need to absorb losses; and be prepared for environmental-related litigation risks, the EBA said.
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