25 November 2021

SSM's Elderson: How well are European banks managing their climate-related and environmental risks?

Covering 112 banks directly supervised by the ECB with €24 trillion of combined assets, the report is an unprecedented stocktake of European banks’ preparedness to adequately manage and disclose their exposure to C&E risks

Today, the ECB published its report on the state of climate-related and environmental (C&E) risk management in the banking sector^[1]. . With the publication of this report, the ECB aims to offer an overview of the current trends in addressing and disclosing C&E risks within the euro area banking sector. It also intends to share some of the existing good practices in managing these risks in the hope that banks can draw inspiration from these to mitigate the gaps identified so far and to proceed more forcefully with their C&E risk management efforts.

This report has been compiled just one year after we published our Guide on climate-related and environmental risks for banks, demonstrating the ECB’s commitment – within its mandate – to making the financial system more resilient to these risks.

Main findings of the ECB report on the state of climate-related and environmental risk management

In the Guide, the ECB set out 13 supervisory expectations for the banks under its direct supervision regarding the integration of C&E risks into their business models and strategies, governance and risk appetite. As a follow-up to that Guide, the report published today presents the findings of the benchmarking exercise, which constitutes a thorough review of the practices and plans of the largest banks in the euro area and covers more than 130 areas of focus. In the context of this exercise, supervisors across all Joint Supervisory Teams covered by the exercise discussed the climate risk approach of the banks under their supervision as part of the supervisory dialogue for the first time.

Almost all banks that participated in this exercise are only partially – or not at all – aligned with the ECB’s supervisory expectations. Many of them do recognise, however, that C&E risks will have a material impact on their risk profile within the next three to five years, especially in terms of credit, operational and business model risk. Tellingly, of the institutions that report C&E risks as being immaterial to them, not a single one has an appropriate materiality assessment in place: they are either not comprehensive enough in their risk assessment or they haven’t even attempted to analyse the impacts of climate risk on their business at all.

Nevertheless, we do see that, most banks have started to adapt their practices to meet our supervisory expectations. But only the practices of a few have been shown to have a discernible impact on their strategy and risk profile. So far, banks have made most progress in adapting their governance and policies, while some banks have started to incorporate C&E risks into their lending policies and to attribute formal responsibilities within their organisation for the management of these risks. However, banks have been placing less emphasis on identifying and measuring these risks through a set of key risk indicators. And fewer than half of them have taken any steps at all to adjust their business model and strategic planning in the face of inevitably larger climate-related risks going forward. Banks have made the least progress in the areas of internal reporting, market and liquidity risk management, and stress testing....

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