The transition to a greener economy is creating significant challenges for banks across the European Union, according to a recent study by the European Central Bank. As the EU pushes forward with policies aimed at cutting carbon emissions—such as imposing higher taxes on polluting industries and tightening environmental regulations—financial institutions are increasingly exposed to credit risk.
The ECB’s analysis indicates that when the cost of emitting carbon rises, for example through more expensive emissions allowances, businesses with high carbon footprints—such as heavy industry, energy producers, and transport companies—face mounting operational costs and declining profitability. This financial strain makes it more difficult for them to repay their loans, increasing the likelihood of defaults and putting pressure on the banking sector.
While this is a concern across the EU, the situation is especially critical in Greece. Many Greek banks have significant exposure to carbon-intensive sectors, including energy companies, industries that rely on natural gas or oil, and transportation firms—particularly those operating in coastal shipping and maritime logistics, key pillars of the Greek economy. For instance, a power company that relies on natural gas is likely to see its costs rise sharply in the coming years as emissions regulations tighten. If such a company struggles to remain profitable, loan repayments could be delayed or missed, turning loans into non-performing assets and adding stress to banks’ balance sheets.
The ECB study estimates that in scenarios involving a sharp increase in carbon costs, the creditworthiness of such companies could drop by as much as 30%. For banks, this would mean setting aside more capital to cover potential losses, which in turn reduces their ability to issue new loans and support broader economic activity.
To navigate these risks, the ECB recommends that banks diversify their loan portfolios and reduce their reliance on high-emission industries. This, the study argues, is essential to strengthening the resilience of the European banking system during the green transition.
These risks are not merely theoretical or long-term. Emission allowance prices in Europe have already risen significantly, driving up the cost of electricity production. This is particularly impactful for countries like Greece, which are still in the early stages of transitioning their energy systems.
