Banks Miss ECB Climate Test

    Stockholm (NordSIP) – One year following the publication of the ECB’s Guide on climate-related and environmental risks for banks, the central bank’s Banking Supervision department published its first review of banks’ approaches to climate and environmental risks management. According to the report, the European banking sector still has a long way to go before being able to meet the supervisor’s expectations.

    ECB Expectations

    The report covers more than 130 areas of focus and encompasses 112 banks directly supervised by the ECB with €24 trillion of combined assets. According to the ECB, the survey represents an unprecedented review of European banks’ preparedness to adequately manage and disclose their exposure to C&E risks.

    The report tracks the performance of the EU’s largest banks along 13 supervisory expectations laid out by the 2020 guide regarding the integration of climate and environmental (C&E) risks into their business models and strategies, governance and risk appetite.

    Missed Expectations

    ”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,” commented Frank Elderson, Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB.

    According to the report, ”the quality of the plans submitted varied considerably
    across the institutions (Figure 1). Some institutions provided short and
    unsubstantiated answers to the questionnaire, while others submitted large project
    documents detailing all the actions planned over time.”

    Only 59% of surveyed institutions had assessed whether climate-related have a material impact on their risk profile. However, only 6% assessed whether other environmental risks have a material impact on their risk profile.

    Very few banks had integrated C&E risks into selected processes for the risk management framework. Only 32% of the banks had adopted procedures to collect C&E information from (new) clients. 26% had adopted a strategic approach to manage C&E risks. 8% had an assessment of the impact of C&E risks on capital adequacy while just 9% had adopted procedures to quantify C&E risks.

    In terms of credit risk management, most progress had been made in terms of integrating C&E risks into sector lending policies (46%), client due diligence (46%) and risk claissification (28%). Only 22% had integrated C&E risks into collateral valuations. 19% had processes incorporating the issue into portfolio analysis. Loan pricing was the process where C&E risks had been the least integrated by banks.

    Very few banks had also made any progress regarding market risk management. on 4% had integrated C&E risks into market risk measurement, 5% into portfolio analysis, 10% into new product approval policies and 11% into transaction due diligence.

    Urgent Implementation Needs

    ”Banks urgently need to set ambitious and concrete goals and timelines – including measurable intermediate milestones – to mitigate their exposure to current and future C&E risks. They will need to deploy forward-looking risk management tools that can capture longer-term risks, such as portfolio alignment approaches, and to closely monitor their strategic positioning against science-based transition pathways. To date, the majority of banks have no plans for concrete actions to adjust their business strategy. While half of the banks are contemplating setting exclusion targets for some segments of the market, only a handful of them mention actively planning to steer their portfolios on a Paris-compatible trajectory,” Elderson adds.

    To assist banks with this task, the report includes 12 examples of good practices that banks can emulate in order to align their practices with the ECB’s C&E risk management expectations. Banks should make the most of these examples and accelerate the implementation of the ECB’s C&E risk integration recommendations into their business practices. ”The message of today’s report is clear: the time for action is now,” Elderson concludes.

    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.

    Latest Posts


    NordSIP Insights Handbook

    What else is new?

    ESG Leaders 2023