Researchers at the European Central Bank (ECB) revealed that commercial banks in the eurozone, touting themselves as environmentally responsible or ‘green’, are, in fact, major contributors to new lending for significant polluters.

In a blog published on Wednesday (6 December), the bank supervisor announced that commercial lenders that talk a lot about environmental disclosure issued approximately four percent more loans to the worst polluters than average banks.

The blog post follows a November speech by ECB’s executive board member Frank Elderson, who leads the bank’s green efforts, in which he warned commercial banks to satisfy the ECB’s climate requirements by the end of 2024 — or else pay a penalty for every day.

“Let me be clear: it is not for the ECB to tell banks who they should or should not lend to,” he said. “[But] failing to manage climate and environmental risks adequately is no longer compatible with sound risk-management.

The ECB has pressured commercial lenders to enhance climate disclosures and improve risk assessments for three years.

But researchers found most banks, even the ones claiming to be green, failed to adapt their lending practices to the realities of global warming.

By analysing ‘green’ disclosures of 101 systemically-important eurozone banks and comparing them to new loans to polluting sectors between 2014 and 2022, they were able to “shine a light on a serious disconnect between banks’ environmental disclosures and their lending practices.”

These “arise because banks are reluctant to disrupt established lending relationships with larger carbon footprint borrowers,” the economists wrote.

One of the economists is team lead at the ECB, supported by three academics from different European and US universities.

Banks presenting themselves as environmentally-conscious allocated more funds to polluting industries.

The claim by some banks that these loans helped so-called ‘brown’ borrowers move toward greener technologies was unfounded, according to the ECB economist, because the polluting companies failed to reduce emissions or commit to voluntary emission targets.

“Strikingly, these banks also show a reluctance to lend to firms that could potentially drive innovation in cleaner technologies,” the researchers wrote.

Banks increase their exposure to climate risk by continuing to lend to polluters, which may result in losses further down the line.

But they keep lending to big polluters to “keep borrowers alive and avoid realising losses on the balance sheet,” the blog concludes.

Reducing their exposure to these companies would minimise risk, but the blog’s authors concluded there were “insufficient incentives for banks to change their lending policies.”

With the ECB’s announced penalties, the ECB hopes to move commercial lenders to account for the climate and environmental risk of their lending practices in 2024.

Continued failure to do so would “increasingly call into question the fitness of those in charge of establishing and steering the banks’ practices,” said Elderson.