The European Central Bank (ECB) has published for consultation a guide setting out how it expects banks to “safely and prudently” manage, and disclose, climate-related and environmental risks.
According to the ECB, the aim of the guide is to raise industry awareness of climate-related and environmental risks and “foster banks’ preparedness for managing them under current prudential rules, in accordance with the European Commission’s Action plan on financing sustainable growth and the European Banking Authority’s Action plan on sustainable finance”.
The guide is also intended to inform supervision of banks, with the ECB noting that it was drafted in close cooperation with the national supervisors.
According to the ECB, it wants banks to account for climate-related and environmental risks because “they drive existing prudential risk categories and can have a substantial impact on the real economy and banks”.
The guide sets out 13 overarching expectations, broken down into further sub-expectations, spanning the areas of business strategy, governance, risk management, and disclosure.
They include that banks consider climate-relate and environmental risks at all stages of the credit-granting process and monitor them in their portfolios, and develop stress-testing scenarios that incorporate these risks.
With regard to disclosures, the ECB prefaces its expectations by noting developments at the EU regulatory level, namely that institutions subject to the Non-Financial Reporting Directive (NFRD) will be asked to report against the sustainability taxonomy being developed by the EU, and that the European Commission is planning a review of the NFRD – a consultation is underway.
In the draft guide the ECB grants the possibility for a bank to deem climate-related risks as immaterial, but sets out an expectation that it document its judgement with the information underpinning its assessment.
Supervisees are also “reminded of the European Commission’s advice not to prematurely consider climate-related risks as immaterial owing to their longer-term nature”.
Scopes 1, 2 and 3
On the content of climate-related and environmental risk disclosures, the guide points banks in the direction of the Commission’s guidelines on reporting climate-related information, noting that the document integrates the recommendations of the Task-Force on Climate-related Financial Disclosures (TCFD) and provides guidance consistent with the NFRD.
It makes clear it expects banks to disclose their Scope 1, 2 and 3 emissions for the whole group, with the ECB stating that it understands Scope 3 emissions as including emissions from banks’ assets, or “financed emissions”.
Banks are “encouraged to adopt a granular approach to measuring carbon emissions,” and expected to disclose or reference the methodologies used and assumptions made.
On metrics, the ECB has said that supervisees are expected to develop metrics that consider the long-term nature of climate change, particularly how different paths of temperature and greenhouse gas emissions may accentuate existing risks.
It noted that “risks are not expected to be excluded from the [internal capital adequacy] assessment because they are difficult to quantify or because the relevant data are not available”.
“Where such quantification methodologies are subject to further developments, also taking into account the current work and upcoming publications of international networks and standard setters, institutions are expected to make active efforts to develop or apply appropriate tools and methods,” it said.
The consulation is open until 25 September. More information can be found ECB guide on climate-related and environmental risks">here.
more at IPE
© IPE International Publishers Ltd.
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article