The European Central Bank (ECB), on Thursday, said that it is going to impose penalties on 20 banks operating in Europe if they fail to address the issues pertaining to their management of climate risk.
People familiar with the matter have said that the ECB has sent letters to these banks and given them individual deadlines to fix the issues identified by it.
According to the media reports, the penalty issued by the ECB would pile up every day and can be compounded to 5 per cent of their daily average revenue.
There is diversion among banks in the shortcomings as observed by the ECB across lenders. Therefore it is very unlikely that all of the banks will get hit by penalties, the report added.
The ECB had earlier found that many lenders did not deliver in meeting an interim deadline of last March.
Also, in the month of October, the European Banking Authority had said that it is going to revise the framework that sets industry-wide capital requirements to better incorporate Environment, Social and Governance (ESG).
The European Central Bank is authorised to directly oversee the 109 banks operating in Europe.
ECB executive board member Frank Elderson said in a Brussels address that they expect banks to manage their C&E (climate-related and environmental) risks similar to any other material risk they had been exposed to.
He had also added that the ECB has observed in its finding that the banks were generally lagging in this aspect. Therefore, ECB has told those banks to take remedial measures for the shortcoming by a certain date. If these banks don't comply then they will have to pay a penal charge for every passing day the shortcoming remains unresolved.
Elderson has also said that by failing to disclose a proper materiality assessment, these banks are simply continuing to turn a blind eye to potential risks that it may entail in their balance sheet.
In the year 2020 also, the ECB had published a list of recommendations related to the bank's governance in climate risk terms which also included listing the percentage of carbon-related assets in each portfolio.