European banks' loan books 'misaligned' with Paris accord, ECB says

A large chunk of European banks' loans do not meet the goals of the 2015 Paris Agreement on climate change, which could lead to transition risks.

An analysis of 95 banks, which covers about three-quarters of euro area loans, found that their credit portfolios are "substantially misaligned" with the Paris accords' targets, said Frank Elderson, the European Central Bank's supervisory board vice-chair.

As a result, there are elevated transition risks for some 90% of the banks, according to a blog post on the ECB's website. Such risks relate to exposures to companies in the energy sector that are lagging behind in terms of phasing out carbon production processes and implementing renewable energy production.

Additionally, 70% of the banks are also at risk of litigation headaches given that they publicly committed to the Paris accord. "This is more relevant than ever, considering that climate litigation has skyrocketed in recent years," Elderson said.

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Elderson's post comes just a few days after Friends of the Earth announced it would file legal action against ING Groep NV if the Dutch lender does not meet its climate demands.

The demands included ING aligning its climate policy with the Paris Agreement's 1.5-degree-celsius target. The action would make ING the first bank in the Netherlands to be sued over climate policies. ING said it is in regular dialogue with stakeholders, including Friends of the Earth.

The ECB encouraged more banks to align their policies with the Paris Agreement. Elderson also noted that banks that will be covered by the European Banking Authority's Pillar 3 capital guidance on environment, social and governance risks will have to report their alignment by the end of 2024.