EBF response to BCBS Consultation ‘Principles for the effective management and supervision of climate-related financial risks’
14 February 2022
Where material risks exist, it must be up to the institution to cover or mitigate them in line with their own business strategy and risk appetite.
Key messages from the EBF response:
- Support for the ongoing efforts of banks and regulators to
ensure proper identification, understanding management, and supervision
of risk stemming from climate-related factors. Management,
transformation, and absorption of financial risks will be a key element
in the transformation of the global economy to net zero as substantial
investments e.g. in new technologies need to be financed. Where material
risks exist, it must be up to the institution to cover or mitigate them
in line with their own business strategy and risk appetite. The role of
supervisors should be to ensure that such risks are considered by the
institutions, identified, understood, and managed.
- Welcome the Basel Committee‘s focus is on the risks
associated with climate change, not the banks’ action to tackle climate
change. Banks’ shifting of resources towards a low-carbon
economy and engagement with customers is key in financing the
transition. While banks are fully aware of their responsibilities and
are committed to playing their role, it is not realistic to expect
financial services to make this shift in the absence of a major change
in the incentives of the underlying economy. The climate objectives must
be transposed in the industrial policies and relevant national legal
frameworks. Banks cannot be put in the position of being the primary
enforcers of climate policy, nor should the prudential framework be used
as a substitute for direct mechanisms such as taxes or industrial
measures.
- Balance harmonization efforts at the global level with existing methodological flexibility. We
welcome harmonization efforts at the global level and believe the
principles of the Basel Committee have to be respected by
national/regional authorities. However, as several authorities have
already issued their supervisory expectations for climate-related risk
management by banks the current flexibility in terms of methodologies as
well as proportionality needs to be maintained over time given the
large-scale investments required for the development of methodologies
and internal systems. Global harmonization and streamlining are in
particular essential for reporting and disclosures requirements.
Harmonization and alignment of data definitions are needed, ideally at a
global level not only to address reporting burden but also to prevent
market confusion to avoid multiple reporting obligations or reporting of
similar but slightly different information given in response to
diverging regulatory requests and definitions.
- Capital should be determined with risk-sensitive metrics but it is too early for quantitative impact on the capital .
At this stage, however, the relationship between risk drivers and
actual risk levels on capital has not been established yet. Current risk
measure models are not developed for a long-time horizon, the
underlying capital planning likewise cannot be designed to take capital
decisions in 30 years as the uncertainty increases based on accumulating
assumptions. There are still a lot of uncertainties as to the evolution
of physical and transition climate risk drivers coupled with a lack of
reliable data and statistical data elements as well as lack of skills
and methodologies to understand the expected impact given the
interrelation between physical risks and transition risks respective
evolutions (according to climate policies, technology, investor and
consumer behavior, etc.) and the non-linear, incremental nature of
physical risks over time in particular. Scenario analyses are also still
in a pilot stage and will become more sophisticated over time. Stress
testing methodologies for ESG risks have so far mainly been applied in
an exploratory manner. While some assumptions and simplifications are
needed so that the exercises are doable given the current limitations
regarding data and methodologies, the framework and its results might be
unrealistic, and special care has to be taken when analyzing the
results. Therefore, as long as data, methodologies, and results of
regulatory stress testing exercises are not stabilized, these exercises
should not imply any quantitative impact on the capital requirement of
the entities. Qualitative impacts in the supervisory review process
should be restricted to very limited cases (for example, where it is
unequivocal that a bank has not started to set up the governance and
internal processes to integrate and account for climate-related
financial risks). Climate-related stress testing should also be kept
separate from “regular” stress testing.
- A phased-in approach as a way forward. Given the
current lack of available quality data, harmonized definitions, and
forward-looking risk methodologies to assess the impact of
climate-related risk on existing risk categories we believe it is
necessary to underline the need for a phase-in approach for banks
EBF
© EBF
