ECB publishes report on climate and environmental risk management – Finance and Banking


Worldwide: ECB publishes report on climate and environmental risk management

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In a new report, the European Central Bank (“ECB”) highlighted “good practices” in climate and environmental risk management (“C&E”) in the banking sector. The ECB asked 112 institutions to conduct a self-assessment of their current practices against 13 prudential expectations and to provide an implementation plan to address these risks.

Among its findings, the ECB observed good practices from institutions, ranging from ‘strategy setting procedures to specific qualitative and quantitative indicators in risk appetite statements, and materiality assessments to risk management credit “. The least significant progress was made in the areas of internal reporting, liquidity risk management and stress tests; the ECB noted that none of the 112 institutions came close to fully aligning their practices with the expectations outlined. Substantial progress has been made mainly by the large institutions; however, almost all of the institutions assessed have developed implementation plans to address C&E risks.

In its report, the ECB highlighted several “good practices” to be taken into account by institutions. Some of these practices include:

  • using “dual materiality” assessments, where institutions consider both financial materiality and environmental materiality;
  • manage C&E risks using qualitative statements and quantitative indicators;
  • integrate C&E risks into reporting practices;
  • include criteria related to C&E in sector and investment policies; and
  • perform stress tests using a defined baseline to assess physical and transient risks.

The ECB concluded that (i) although institutions have started to progress, it remains slow; (ii) the ECB recognizes the challenges associated with integrating C&E risks into “strategies, governance and risk management arrangements.
[that] are constantly evolving ”; and (iii) the ECB expects all institutions to take “decisive action to address the shortcomings” identified in the supervisory feedback letter.

Remark

The ECB report perhaps offers a harbinger of what US institutions might expect as the Fed, FDIC and OCC incorporate an assessment of institutions’ risk management for risk climate finance. However, for US institutions, guidance on managing climate-related financial risk is more likely to take the form of principle-based guidance than rules-based guidance.

Primary sources

  1. European Central Bank Report: The State of Climate and Environmental Risk Management in the Banking Sector

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