Background

In the latest in our series of ESG publications, we take a look at the ECB’s preliminary views on the steps Banks are taking to address climate and environmental (C&E) risks. As part of their ongoing focus in this area, the ECB has published an article on the progress European Banks have made in addressing and mitigating these risks.  This is based on feedback received in response to a self-assessment questionnaire circulated earlier in the year to Banks, which covered the 13 supervisory expectations the ECB laid out in its 2020 Guide on Climate Related and Environmental Risks.

Preliminary Findings

The preliminary findings recognise that while some effort has been made, the speed at which changes to policy and procedures are taking place is too slow in the ECB’s view, with only 60% expected to meet supervisory expectations by the end of 2022. Frank Elderson, Vice-Chair of the ECB’s supervisory board is quoted in the article as saying “Climate-related and environmental risks cannot just be an afterthought – they pose a very real challenge today and could have serious implications tomorrow”. 2030 marks the deadline for key climate related targets like the EU’s ‘Fit for 55’[1], referring to a target of at least 55% reduction in emissions relative to 1990 levels. The transitional risks associated with such policies, as well as the physical risks linked to climate change that are beginning to manifest themselves represent immediate risks to the financial system and explain the ECB’s drive for swifter action.

Together with the timing issue, the ECB highlighted lack of progress in the following areas of focus:

  • Risk - Incorporation of C&E risks into strategies and risk mitigation, including defining associated KPIs and risk limits
  • Credit – Incorporation of C&E risks into credit, operational and liquidity risk management
  • Finance – Reporting and disclosures (with information about materiality assessments and greenhouse gas emissions specifically called out)
  • Operations - Operational details of how plans will be implemented, and deliverables produced

Next Steps

Joint Supervisory Teams have started reviewing the practices and implementation plans submitted by Banks as part of the self-assessment process. Detailed feedback letters will be issued highlighting the areas where decisive actions are needed, and in some cases qualitative supervisory measures may be in imposed as part of the 2021 SREP.  Data and methodology gaps are one of the areas where the ECB notes few banks have plans to address immediate needs or put in place processes to capture relevant data point forward.  This is likely to be an area where the ECB will push for more tangible actions on, including the use of proxies as an intermediate step.

Future Developments

In line with EU and EBA policies, the regulatory and supervisory focus on climate change and environmental risks is just beginning.  Next year will see climate stress testing, and a full supervisory review that will include how C&E risks have been incorporated into strategy and risk frameworks. Biodiversity loss is likely to be next on the agenda together with pollution, and Banks can expect the focus on broader sustainability related risks to grow. Developing dynamic policies and systems now that will be meet both immediate and future supervisory expectations can help Banks build resilience for the changes to come.

Why Grant Thornton

Grant Thornton’s Financial Services Risk, Consulting and Advisory teams are comprised of dedicated experts who are experienced in supporting banks and investment firms with a variety of regulatory challenges.

In particular, our industry-leading Prudential Risk team understands that regulation continues to drive the strategic agenda for banks. Working together with our dedicated Sustainability Team, we believe our skillsets combine the best of scientific knowledge with real world financial and regulatory experience to deliver practical, actionable solutions. We specialise in assisting clients across the financial services sector in navigating through the complex maze of C&E regulation and support clients to identify regulatory obligations and work towards full compliance balanced with your business needs.

[1] https://ec.europa.eu/commission/presscorner/detail/en/IP_21_3541

 

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