11 November 2022

EBF: Are Volatile Geopolitics and Macroeconomics Disrupting the Path to Net Zero?

The world has changed significantly since European banks began making their net zero commitments. The COVID-19 pandemic and the war in Ukraine have completely altered the operating environment. This new reality poses significant questions for European banks’ climate strategies.

 Net zero remains at the top of the industry’s long-term agenda, but over-reliance on fossil fuels – in tandem with recent shocks – is also contributing to short-term economic and social damage that needs to be addressed immediately.

So, how is the current situation impacting the implementation of transition plans? Is short-term noise distracting banks from the decades-long process of decarbonization? Or can banks stay on track to deliver their net zero commitments?

To answer these important questions, the EBF and EY conducted a survey of 27 major European banks from 18 jurisdictions. This report summarizes our key findings as follows:

Key Findings

• Most European banks have made net zero commitments, joined climate action initiatives and started to produce climate-related disclosures. Many have begun to embed climate risks into their processes, and to align lending portfolios with their climate commitments.
• The economic and political volatility triggered by recent shocks are having a significant effect on banks’ strategies. In particular, the war in Ukraine has slowed transition agendas.
• Banks have not changed their overall risk appetite, but sector attitudes have been affected by rapid changes to the economic position of different industries.
• The greatest effect is on the energy sector, which is overweighted by 50% of our respondents. There is also an increased focus on transportation. In contrast, mining & metals, business services, manufacturing and industrials are comparatively underweighted.
• Despite the short-term hit to transition agendas, European banks remain fully committed to their net zero goals. This reflects climate science, demand for clean energy and banks’ duty to support the transition – reinforced by supervisory, public and political expectations.
• Banks face major hurdles as they seek to support the real economy while continuing the process of decarbonization. These include inconsistent disclosures, uncertain government policies and the need for sector-by-sector transition pathways.
• On the upside, many banks see the current crisis as accelerating medium to long-term demand for clean energy finance and infrastructure renewal.
• Banks’ ability to successfully manage their balance sheets while meeting stakeholder expectations will not only depend on macroeconomics, but also on the actions of clients, governments and regulators. Banks can influence these outcomes through thoughtful, collective engagement.
• It remains to be seen how European banks will stay on the road to net zero while shouldering the burden of two exceptional global crises. Clear measurable transition plans, backed up by effective stakeholder engagement, will be vital to delivering real-world impact.

EBF

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