I want to describe the progress that we in ECB Banking Supervision have observed in recent years, through the lens of our interactions and exercises with the banks we supervise.
Many thanks to the European Financial Services Round Table (EFR) for hosting this session on the state of play of managing climate-related and environmental risks, or C&E risks for short, in the financial sector. As the EFR recognised early on, in a statement released in 2015 just before the adoption of the Paris Agreement, the financial sector has a key role to play in understanding and managing these risks.
Back in 2020 we published our Guide on C&E risks for banks. The Guide demonstrated the ECB’s commitment – within its mandate – to making the financial system more resilient to these risks. In the Guide, we set out 13 supervisory expectations for how the banks under our direct supervision should integrate C&E risks into their business models and strategies, governance and risk appetite. In doing so, we were very much moving in lockstep with the global principles for supervising C&E risks. At first, this represented an informal global consensus, building on the prevailing best practices identified by the global Central Banks’ and Supervisors’ Network for Greening the Financial System (NGFS). By now, however, there is a concrete formal global consensus, enshrined in the principles for the effective management and supervision of these risks, which the Basel Committee on Banking Supervision adopted and published in June 2022.
As a follow-up to our own Guide, in 2021 we published the findings of a benchmarking exercise in which we thoroughly reviewed the practices and plans of the largest banks in the euro area across more than 130 focus areas. We conducted this exercise based on the banks’ own assessments of their performance against our supervisory expectations. Covering 112 directly supervised banks, with combined assets of €24 trillion, the exercise was an unprecedented stocktake of European banks’ preparedness to adequately manage and disclose their exposure to C&E risks. Banks were indeed very open and candid in these self-assessments, for which we as supervisors were very grateful. The results showed that while most banks acknowledged that C&E are material for their risk profile within three to five years, almost all banks were only partially or not at all aligned with our supervisory expectations.
Against the backdrop of this relatively poor performance by the banks, almost one year ago I announced that 2022 would be the year in which we would move to what I called an immersive supervisory approach to C&E risks. The year in which these risks become fully integrated in the day-to-day activities of our joint supervisory teams, who are in constant contact with banks. And the year as of which C&E risks come to form an integral part both of our ongoing dialogue with supervised banks, and of the supervisory review and evaluation process, or SREP. This is an encompassing and integrated approach, which supervisors and banks are already very familiar with for traditional risk categories. It is an approach that is here to stay. And its objective is to ensure banks fully account for and manage C&E risks, as they would any other material risk...
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