Lawsuits looming against ECB’s climate policy, expert says

Banks may already be suing the European Central Bank over its policy of penalising institutions that fail to comply with its climate risk management guidelines, a legal expert tells Central Banking.

The ECB revealed in March that it had issued 31 binding decisions to “potentially” impose periodic penalty payments (PPPs) on banks that did not adhere to prudential requirements for climate-related and environmental risks.

PPPs are daily recurring financial charges that could amount to up to 5% of a bank’s average daily turnover. The ECB can use them to pressure banks into meeting its supervisory expectations.

René Smits, professor emeritus of law at the University of Amsterdam, tells Central Banking that so far there has not been any legal action against the ECB over the PPPs – or at least not any that can be observed in the public record.

However, citing the latest edition of the European banking union case law tracker, of which he is a co-author, Smits says lawsuits could well be underway behind the curtain.

“We surmise that [the banks] have either gone first to the Administrative Board of Review, or that they are preparing court cases against the ECB,” he says.

The Administrative Board of Review is an independent body that reviews supervisory decisions made by the ECB at the request of the supervised banks or other legal entities.

In 2020, the ECB rolled out its climate supervisory expectations for banks. These include assessing the impact of climate risks on a lender’s portfolio and including climate risks in its governance framework. It gave banks until the end of 2024 to fully comply with such expectations.

In a speech in February, Frank Elderson, an ECB executive board member, said most banks had complied, but “a small group of outliers” were still missing “foundational elements” for climate risk management.

For those banks, he added, the ECB had issued binding decisions which outlined the “potential imposition of [PPPs] if they failed to meet the requirements in a timely manner”.

“To avoid any doubt, we will proceed in exactly the same way with respect to the third and final deadline that fell due at the turn of the year,” Elderson said.

Smits says the penalised banks could argue in court that the ECB has no power to require them to incorporate climate risk into their risk management practices in a manner that the supervisor desires – though he adds that he does not agree with such reasoning.

He says the banks could also challenge the ECB over the fairness of the procedure and claim the supervisor did not consult them sufficiently before imposing the penalties.

“This would be the first time the ECB would apply PPPs, which have been in the law for years but have never been used,” he says.