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The climate crisis is looming large on Wall Street

November 22, 2020. Summarized by summa-bot.

For all their environmental overtures, banks are still pumping billions of dollars into fossil fuel companies. That could become a high-priced habit, as regulators move to tighten rules around how lenders reflect climate-related risks in their accounts.

What's happening: The European Central Bank said last week that it will start conducting "in-depth" assessments of how bank balance sheets account for climate risks in 2022.

"Ensuring that banks' balance sheets also reflect climate-related and environmental risks is a prerequisite not only for the resilience of the banking sector, but also for the accurate pricing of these risks," the ECB's supervisory arm said in a statement on Wednesday, adding that it will begin discussions with lenders on the new approach early next year.

In a first, it directly addressed the implications of climate change for banks in this month's financial stability report, saying that better disclosure could improve the pricing of climate risks and avoid the kind of abrupt changes to asset prices that cause financial system shocks.

"Federal Reserve supervisors expect banks to have systems in place that appropriately identify, measure, control, and monitor all of their material risks, which for many banks are likely to extend to climate risks," the Fed said.

More than half the syndicated loans of major US banks are in sectors of the economy that make them vulnerable to the risks posed by climate change, according to sustainability non-profit Ceres.

Companies were selected based on their exposure to decarbonization risks and were urged to prepare "Paris-aligned" earnings reports that reflect what climate change means for their business.

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