Lagging behind climate change – ECB draws sobering conclusion from institutions‘ self-assessments on climate and environmental risks

ECB draws sobering conclusion from institutions' self-assessments on climate and environmental risks

In August 2021, the ECB published the first results of its evaluation of bank climate and environmental risk self-assessments in the Supervision Newsletter. Now, the full data collection report on the supervisory review of banks’ approaches to manage climate and environmental risks has been released, with some startling new developments.

Background
In November 2020, the ECB published its guidance on climate and environmental risks, setting out 13 supervisory expectations for banks. Subsequently, the ECB requested banks to conduct a self-assessment regarding their current level of compliance with the 13 expectations. Furthermore, the ECB required institutions to develop action plans to fully implement these expectations.

The ECB states that the banks have not yet sufficiently addressed climate and environmental risks, nor have they identified the areas for action in sufficient detail. Thus, in the ECB's view, only about 1/3 of the banks have taken a sufficiently granular look at the relevant issues, while the majority of institutions have so far taken only insufficient analyses and steps to meet the requirements.

Overall, the ECB is not satisfied with the current state of play, stating that banks are too slow in adapting their current practices for climate and environmental risk management and disclosure and will not meet the ECB's expectations at this pace in the foreseeable future.

Results & further details

Current Status
As of February 2021, the majority of banks have identified a significant need for action in their Self Assessments: Overall, most institutions assessed their existing processes for managing climate and environmental risks as only partially or not at all in line with regulatory expectations.

To be sure, institutions have begun to lay the groundwork for addressing climate and environmental risks in their current governance structures and in risk inventories. However, only very few institutions have yet succeeded in integrating climate and environmental risks holistically into their strategies, risk appetite and limit systems, and risk management processes.

This is also reflected, for example, in the feedback on credit risk management. In this area, only less than half of the banks have considered climate and environmental risks in their lending policies and processes. Furthermore, most banks currently lack adequate consideration of these risks in risk classification systems and pricing.

As a result, the ECB finds that banks are currently mostly unable to adequately monitor and manage their climate and environmental risk strategy and risk profile.

Implementation or action plans
In May 2021, institutions submitted their implementation or action plans for meeting ECB requirements to the ECB. The ECB estimates that institutions will make significant progress in monitoring and managing climate and environmental risks by implementing their plans. Nevertheless, the ECB sees a clear need for improvement for more than two-thirds of the institutions to ensure full compliance with the requirements. This applies in particular to the management of operational risks, liquidity risks, and reporting and disclosure:

Source: ECB’s supervisory assessment

From the ECB's perspective, banks are called upon to comply with the requirements promptly and in full. In this respect, the ECB reiterates the high supervisory relevance of climate and environmental risk management and will promptly request institutions to address identified deficiencies in the action and implementation plans.

Conclusion
In addition to the climate risk stress test, the ECB will conduct a comprehensive supervisory review in 2022, including an analysis of the extent to which banks have integrated climate and environmental risks into their strategies and risk management processes. Due to the high expectations of the supervisor, it is even more important for the institutions to review the previous self-assessments on supervisory expectations as well as the design of their implementation and action plans, and to further push implementation.

We would be happy to discuss the implementation of the ECB's expectations with regard to the management of climate and environmental risks and to support you with our implementation experience.

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