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

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Brussels, 9^th November2022 – 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.

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For more information

Denisa Avermaete, Senior Policy Adviser – Financing Sustainable Growth, d.avermaete@ebf.eu
Alexia Femia, Policy Adviser – Financing Sustainable Growth, a.femia@ebf.eu

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About the EBF:

The European Banking Federation is the voice of the European banking sector, bringing together 32 national banking associations in Europe that together represent a significant majority of all banking assets in Europe, with 3,500 banks – large and small, wholesale and retail, local and international – while employing approximately two million people. EBF members represent banks that make available loans to the European economy in excess of €20 trillion and that reliably handle more than 400 million payment transactions per day. Launched in 1960, the EBF is committed to a single market for financial services in the European Union and to supporting policies that foster economic growth.

About EY

At EY, our purpose is Building a better working world. The insights and quality services we provide help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. Over 75,000 EY professionals are dedicated to financial services, serving the banking and capital markets, insurance, and wealth and asset management sectors. We share a single focus – to build a better financial services industry, one that is stronger, fairer and more sustainable.
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