The Impact of Climate Change on Access to Banking Services
FEBRUARY 08, 2022

By David Eacott, Head of Banking Supervision – Malta Financial Services Authority

Climate change will impact all of our lives in the next few years. We will have to change the way we eat, shop, travel and power our homes. Climate change will also have an impact on access to banking services.

Banks will be used as vehicles to drive funding towards climate-friendly initiatives. New EU regulations on sustainable finance will have a significant impact on which customers they lend to. Businesses and individuals who want to borrow from their bank will need to demonstrate their environmental credentials if they want access to money. If you want a loan to purchase or upgrade a property, you will need to ensure it meets environmental standards – for example, its energy usage is minimised or it is powered using renewable sources.

Governments and businesses will also feel the effects. Large carbon polluters such as airlines, car importers and road builders will all have to change their business models if they want continued access to bank funding into the future.

The implications won’t stop there. All the businesses that banks currently lend to will be impacted by climate change.  Banks will need to assess the extent to which those businesses will remain viable in the future.  That means renewed creditworthiness assessment, and more regular information on business performance and their own preparations for changes in the business world as a result of climate change. It’s worth understanding exactly what the potential consequences are.

When it comes to physical risks, we can expect to see sea levels rise, waters warm up, weather patterns change and higher temperatures. As a result, we can anticipate that parts of the economy that are reliant on their proximity to the coast will need to adapt. They may need to invest in coastal defence mechanisms to maintain their viability or, in the case of power generation or desalination, even consider re-configuration of their footprint. If they do not do this early, then the costs of completion for them are likely to be higher, and the impact or disruption they face in the meantime could also be higher.

Meanwhile, we can also expect to see disruption to supply chains. We are already seeing the emerging impact of increases in the price of power supplies arising from issues related to supply; the consequent inflationary impacts on businesses and customers will have to be evaluated. Similar consequences may well ensue in other areas as weather disrupts global agriculture and food harvests. Meanwhile, the capacity for the Mediterranean to maintain its own agricultural sector could be impacted by desertification.

The warming of the seas is leading to significant changes in the biodiversity of the underwater environment. For those businesses that rely on fishing or farming at sea, this is not an insignificant development.

The Mediterranean area’s attractiveness as a tourist destination might be impacted depending on the nature of the changes that come. Our economy is heavily dependent on what happens in the sea, by the coast or with regards to the weather, and the local banking system supports that economy. This makes it incredibly important for banks to monitor the risks and impact on their customers and by extension on their business models.

Other parts of our banking system support trade in emerging market countries, many of which are likely to experience even more pronounced impacts than those we face: the changing face of their coastlines and port locations: the ability to bring raw materials to trading hubs – and even the supply of those raw materials – will all have to be reviewed.

Businesses operating within the EU will face new energy taxation regimes, a carbon border, and expectations to reduce their own carbon footprints. That means they will have to adapt their business models.

Hence it is in their interests, and those of the banks that lend to them, to start early to understand their own strategy, to cost it appropriately, and to spread that cost as much as they can. Banks must understand their customers and how they are approaching this challenge.

Also influencing the business environment will be changes to government policies here in Malta and in other countries important to our own economic success. There are likely to be changes to planning regulations, and expectations for residential and commercial property development; there will be changes to our infrastructure to support de-carbonisation. There may even be changes to working patterns which will impact demand for office space and the expectations of staff. This country is heavily invested in property, and this can support the inter-generational transfer of wealth, but if there are changes to the way in which that property set is valued, then that could have consequences for the nature of economic development.

A recent report published by the European Central Bank concluded that many large banks and institutions are relatively unprepared to deal with climate-related risk, which gives some indication of the work involved. And we know the challenge for banks in Malta is just as large and, through our own survey, it is clear that many have yet to start preparing.

The new Capital Requirements Directive 6 package which the EU Commission recently set out requires banks to integrate climate-change risks into their risk management frameworks. It will be the regulator’s job now to ensure they have done so.

Climate change is here, and it is already having an impact. While managing the uncertainty it will cause will be difficult, it is important to prepare… and to prepare now.


This article draws on a speech given by Mr Eacott at a recent event organised by the Institute for Financial Services and was first published on the Sunday Times of Malta, dated 12 December 2021.