The European Central Bank (ECB) published its first-ever large-scale assessment of how European banks are adjusting their practices to manage climate and environmental (C&E) risks. It concludes that banks have taken initial steps towards incorporating climate-related risks, but not one of 112 banks is close to meeting all supervisory expectations.
The analysis covered 112 directly supervised banks with combined assets of €24 trillion. Half of the assessed banks expect climate and environmental risks to have a material impact on their risk profile in the next three to five years, with credit, operational and business model risk most affected. Notably, all the banks which judged that they are not exposed to climate-related risks had significant shortcomings in their assessment of the risks.
In general, banks have made efforts to meet ECB expectations regarding management bodies, risk appetite and operational risk management. However, they lag behind in areas such as internal reporting, market and liquidity risk management, and stress testing. For example, half of banks haven’t planned concrete action to integrate climate and environmental risks into their business strategies, and less than one-fifth have developed key risk indicators to monitor.
Almost all banks have developed plans to improve their practices. However, the quality of these plans varies considerably, and progress is too slow. Only one-third of banks have plans in place that are at least broadly adequate, and half won’t have completed implementation of their plans by the end of 2022.
In its assessment, the ECB also identified a set of good practices. Two-thirds of banks have made meaningful progress in integrating climate-related risks into their credit risk management, through measures such as enhanced due diligence procedures or new phasing-out criteria to limit financing activities highly exposed to climate-related risks. Likewise, banks are starting to assess energy label certifications when evaluating real estate collateral, although most don’t yet include the results in their lending and monitoring practices.
Publié le 02 décembre 2021