UKNF Supervisory Blog - Komisja Nadzoru Finansowego


The functioning of banks and climate change

Modification date:

Prepared by: UKNF, Commercial Banking Department

In August 2023, Science magazine published an article1 which quoted research results showing that about 930 thousand years ago almost 99% of our ancestors’ population had died due to climate changes that took place in Africa. The changes involved cold wave and drought. The authors estimate that for about 120 thousand years, the population of our ancestors was only around 1 300. This shows clearly that climate change affects not only human life but also our existence and survival as a biological species. 

According to the European Union Climate Change Service, the summer of 2023 was the hottest on record2. The agency argues that scientific evidence clearly shows that new record temperatures are expected in future years, as well as extreme weather phenomena as the inevitable consequences. This will have a significant impact on societies and ecosystems. For example, August 2023 was much more humid in relation to the normal conditions, leading to floods, for example in Slovenia. On the other hand, in the summer of 2023 the climate change resulting in increased temperature caused sudden spreading of fires in Cyprus, Italy, Portugal, Tenerife and Hawaii. 

Climate change has a negative impact on Poland’s real economy. According to the report of the Polish Economic Institute ‘Economic costs of drought for Polish agriculture’3, the average value of crops lost in each year due to droughts is PLN 6.5 billion. About 7% of crops are lost due to temperature fluctuations, and at least 14% of crops will be lost if the average temperature increases by 2 degrees Celsius. In its report of 2021, the Supreme Audit Office points out that 40% of agricultural and forest areas in Poland, and in the Oder river basin even more than 50%, is extremely and heavily exposed to the risk of agricultural drought4.

In response to climate challenges, in 2018 the European Commission endorsed ‘Action Plan: Financing Sustainable Growth’5. The plan includes measures aimed at reorienting private capital to sustainable investments, managing financial risk arising from climate change, and improving sustainable corporate governance in the private sector. 

On 6 July 2021, the European Commission also adopted a renewed sustainable finance strategy: Strategy for Financing the Transition to a Sustainable Economy6. The Strategy indicates key sustainable finance areas that require additional action on the part of the financial sector in supporting the transformation of the EU economy towards sustainability: financing the transition towards sustainability and the financial sector’s contribution to Green Deal targets. 

On 14 July 2021, as part of the European Green Deal, the European Commission  adopted a set of legislative proposals – the Fit for 55 package. It aims to underpin the EU’s position as a global leader in the fight against climate change. The package envisages making the EU climate-neutral by 2050 and reducing net greenhouse gas emissions by at least 55% by 2030 (compared to 1990)7

The measures for the transformation towards sustainable economy should be taken in many areas of human activity. It’s the banks, though, that will play a key role in the financing of green transformation, which goes far beyond the measures oriented to the bank itself, such as savings on the use of paper, water, electricity, waste segregation or replacement of the fleet with electric vehicles. Surely such steps are also important and needed. However, financial institutions may help reduce negative climate change on a much wider scale, especially through measures required under the current regulations, for example by considering climate risk in the long-term strategies and credit policy, supported with proper disclosures. It’s crucial that the current regulations only set the minimum engagement of financial institutions in the mitigation of climate change, while banks may set themselves much more ambitious goals. 

Such strong engagement of banks in the fight against climate change will be surely noticed and appreciated by their customers because social awareness of climate change, especially among youth, is constantly growing. As shown by the results of a global survey conducted in 2020 in 50 countries as part of the United Nations Development Programme8, the respondents (mostly young) highlighted the need for a firm action in the field of climate policy and showed a high level of awareness of climate change. It’s therefore fully reasonable to assume that bank customers will pay more attention to how a bank contributes to climate protection and that they, as users of financial services, will choose the financial institution which implements that goal to the greatest extent. We could quote a popular saying: certain actions pay off but they're not worth it (because they raise ethical concerns) while other actions don’t pay off but they are still worth it. Banks’ actions for climate protection are not only worth taking for the reason of the commitment to environmental protection and corporate social responsibility but also it pays to engage in them, especially for the reason of attracting customers and investors who are environmentally aware, thus gaining easier and cheaper access to funding. It also seems reasonable to assume that in the future, the banks that will not meet environmental standards will be marginalised by customers and investors and face more expensive and less available access to funding in financial markets. 

In the context of green financial products offered by banks, the ethical dimension is also crucial. Products advertised as environmentally sustainable should really contribute to environmental protection, in particular the funds obtained through the sale of such products should be significantly invested in green projects. Otherwise a bank would be exposed to the allegation of unfair marketing (in this case greenwashing), which would entail a sharp increase in reputational risk.

To the best of our knowledge, thanks to the involvement in international work of working groups and other teams, the regulations on climate risks (and more broadly: ESG risks) will pose more requirements for banks. In particular, the current EU regulations focus on the disclosure and reporting of those risks. They will soon be evolving, though, towards incorporation in the Pillar 1 supervisory requirements, in the supervisory review and evaluation process, mandatory reporting and stress tests. This is why climate protection actions taken by banks are not only socially desirable and economically profitable but also necessary in terms of compliance with regulations.