(Bloomberg) -- The more European banks talk about initiatives to support the environment, the more they tend to back carbon-intense firms, according to research by the European Central Bank.
Economists combed through almost 1,400 investor reports and releases spanning 2014-2020 to analyze climate disclosures of systemically relevant institutions in the euro zone. Using granular loan data and other financial information, they found many institutions aren’t practicing what they preach.
“Banks which portray themselves as more environmentally conscious lend more than others to brown industries,” the authors wrote Wednesday in a blog post accompanying the COP28 climate summit currently underway in Dubai.
“This is consistent with the hypothesis that banks with greater exposure to brown industries are under greater pressure to disclose their environmental strategies and plans for decarbonization,” they said.
Since Christine Lagarde took charge in 2019, the ECB has become more vocal on the need to green Europe’s financial system and its own balance sheet.
While constrained somewhat by a primary mandate to deliver price stability, officials in Frankfurt have sought to ensure commercial banks also play their part in addressing climate issues and are quick to call attention to policies they think need changing.
The latest ECB research finds that firms with a larger carbon footprint obtaining loans from banks with more extensive environmental disclosures don’t decrease their emissions or commit to voluntary targets.
At the same time, these banks also hesitate to lend to brown firms with potential to drive innovation in cleaner technologies, and to those that can offer support through research and development spending.
The authors argue that the discrepancies between banks’ climate disclosures and their lending practices is rooted in their reluctance to disrupt established business relationships.
“If borrowers in brown industries are unprofitable and lack alternative financing options, banks may prefer to renew their loans to keep the borrowers alive and to avoid realizing losses on their balance sheets,” they said.
Greater transparency and standardization of environmental disclosures are needed to address these concerns, because “currently there are insufficient incentives for banks to change their lending policies,” according to the blog.
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