Europe’s banks are unprepared to meet increasing demands to spell out their exposure to climate change and other social and governance issues, according to UBS Group AG.

With banks in the European Union facing mandatory disclosures on environmental, social and governance risks starting next year, these issues could start to influence capital requirements, UBS analysts led by Lorraine Quoirez said in a report.

Climate change has moved up the agenda for bankers and their regulators in recent years. The pivot toward a low-carbon economy will have a significant effect on companies’ profits and the value of their assets, with major consequences for their lenders.

However, only a few EU banks have published reports in line with the Task Force on Climate-Related Financial Disclosures, and the European Central Bank has said none of the 125 lenders it sampled in November met its minimum disclosure requirements.

The European Banking Authority is discussing incorporating ESG risks into the supervisory review and evaluation process, meaning “it cannot be ruled out” that these factors will influence so-called Pillar 2 capital requirements starting in 2022, the UBS analysts wrote.

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